“Money that you save is more valuable than money that you spend right away”, quote from Benjamin Franklin, is not entirely true.
The world is a much different place now than when Benjamin Franklin said this (if he even did say it all).
Here are the reasons why “a penny saved is a penny earned is not true”:
- Inflation – this one is easy, but think about it – the current inflation rate is ~2.2%. Although 2.2% is not a lot, your “penny” is automatically worth less every year.
- Taxes – Most families work from Jan. to mid-May for the government just to cover taxes. The more you earn, the more you pay. This is by far the largest chunk coming out of your “penny”
- Technological Changes – Every year some new technology comes out that you have to have. What you do? You go buy it! Even if you don’t buy it now, the market will force you to buy at some point. Go to #4.
- Planned Obsolesce – Think of what happened to the VHS players. What about the new iPhone or Android that comes out every year? Technology erodes at that precious “penny” you saved every year. Smart phones will continually update their operating systems until their older phones are obsolete.
- Financial Expenses – You ever get a bank fee? ATM Fee? Late Fee? Of course you have. Another piece of that precious “penny” gone.
- Lost Opportunity Costs – Very few people think of this one. If all the above factors have been eroding at that “penny” you have saved, what could you have spent it on that actually would have made you money? If $100 dollars is taken out in taxes, that is $100 less dollars you have to invest into something with an actual rate of return. Make sense?
- Interest-Rate Declines – if you depend on the interest of certain investments to meet your financial goals and the interest rate declines, then it may be harder for you to make up the difference. You might have to take an investment with a lower rate of return.
- Stock-Market Declines – This one is the biggest misunderstood concept of them all. People don’t really understand the percentages when it come to gains and losses in their brokerage accounts. If you invest $100 and experience a 20% loss, you would have $80 in your account. Next month you experience a 20% gain. Your dollar amount would now be $96, but you’re still $4 down from the original balance. In reality you’re still 4% down. Your account would have to grow 25% to get back to the original balance.
- Loans and Interest Charges – We have all had a car loan, right? In essence, you borrow the money from the lender at the given percentage rate, which is higher than your “penny” is earning in your savings. Once again eroding that precious penny you have saved.
- Lawsuits – If your wealth is not protected, then your wealth will be a target if you are considered liable in an accident.
Moral of the post – a penny saved is NOT a penny earned. Do not leave money at rest. Put it work in vehicles that help prevent these eroding factors. Protect your money with proper financial structures. Become a steward of your money.