We’re taught that saving is important. It’s great for a rainy day – but how rich can it make you? Realistically, not much.
One of the most important aspects of personal finance is saving money. But it’s really only one tool in which you can find financial security – and just like any craftsperson, you cannot succeed with just one tool in your belt.
In fact, budgeting your money in order to save more is really not enough to make you rich. Here’s why:
1. The Human Willpower Can Only Do So Much
Writing down exactly how you intend to spend for the next few years, and expecting to follow it, is the financial equivalent of a starvation diet. It is unsustainable.
It may be possible for an organisation, such as a company, to follow a tight budget for five, 10, or even 30 years. This is not true for personal finance, which has to take into consideration cognitive effort.
The average human being has a limited store of willpower – or else quitting smoking and losing weight would be non-existent problems. Most people cannot maintain a strict budget beyond the first two months, let alone until retirement or the purchase of their first home.
It’s still possible to save a large amount, but you’ll not be able to get rich solely by budgeting.
2. You’ll Be Exposed to Inflation Rate Risk
Wait, what is inflation rate risk? Basically, it’s the chance of losing money due to the rising cost of living.
Inflation is the unavoidable consequence of a growing economy. This is the reason satay sticks used to be three cents per piece, but are up to about 70 cents today. The same is true of cars, television sets, houses, even public transport. As long as a country’s economy grows, the cost of living will continue to rise.
Saving money does little to help with inflation. The value of your dollars does not change to match the rising cost of living. Instead, the cash will stagnant.
Say you’ve saved S$10,000 today. In 2025, if you haven’t touched the money, you’ll still have S$10,000. But you might find that S$10,000 can only buy you S$7,000 worth of goods, because the price of everything has risen. In this case, you would have lost S$3,000 to inflation.
3. Your Rainy Day Might Arrive Before You’ve Saved Enough
It’s true that you’ll have to control your expenses in the event of a crisis. But if your mentality is to fix everything by saving, you might not be able to cope. This is because there is an absolute limit to how much you can budget.
If you need to save S$500, you’ll probably start by cutting down on luxuries, like ending your gym membership, sticking with cheap meals, and not going to the movies during the weekends.
But what if you are hit by a major cost, such as a S$35,000 surgery? It will be nearly impossible to budget enough to cover a cost like this.
Even if you manage to, you’ll probably wipe most of your savings just to pay off for your rainy day. This only sets you back even more on your journey to becoming rich.
4. Buying Expensive Items Becomes Riskier
Let’s assume you need to purchase a car that costs S$120,000 because it’s a necessity for your job or you have family members with disabilities.
You have, through tight budgeting, managed to scrimp together $60,000 for the down payment. Is it safe to buy it now?
The answer is no, because that $60,000 represents the bulk of your savings over the past six or seven years. If you were to clear out your savings, what would happen if you were faced with an emergency? Your car cannot settle unexpected costs for you. And of course, don’t forget the ongoing cost of loan repayments.
The safest time to buy big ticket items is when your income has risen, not when you’ve barely cobbled together the cash needed.
In particular, loans that you take should not exceed 50% of your monthly income. If you want to buy something expensive that requires a loan, your priority should be to raise your income – not just to scan through bills and trying to guess what costs you can cut.
If your only financial skill is being able to skimp and budget, you may not be able to cope when your one method no longer suffices.
So How Can You Get Richer?
- Work out how much you need to hit your goals, seeing as everyone has different definitions of being rich.
- Rely on a combination of loose budgeting methods (such as saving 20% of your salary monthly) and increasing your income.
- To avoid inflation rate risk, you need to grow your money by at least 5% per annum.
- Identify and develop other ways you can earn a side income, start investing in ways to get dividend pay-outs, and actively negotiate for raises.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.