2 Reasons Why it Is a Bad Idea to Save Your Money Instead of Investing it
Losing money is the central issue of people who wouldn’t risk their savings on stocks. Yes, the stock market is risky, but the rewards could be massive in the long run. You might miss the opportunities on the table and regret not having enough in the future.
Saving money is an arduous task that entails setting aside money bit by bit until you reach the desired amount. You save cash for a rainy day, a holiday trip, or to build an emergency fund. However, it will take eons to grow the money, especially in a savings account that pays minimal interest.
More money to save
Instead of keeping it all in cash, take some from your savings and make it grow through dividend stocks. Compare the growth between your savings account and stock portfolio. You will discover that dividend stocks can increase the value of your money regardless of amount. Meanwhile, your cash is sitting idly and earning virtually nothing.
The goal of investors is to achieve prosperity. You can’t generate cash flow from a savings account, because it’s more like a flat line. Thus, look at investing from a cash flow perspective. Your cash flow today is the stepping stone for future cash flow. Remember, too, that investing is the catalyst for saving. The more dividends you earn, the more money you can save.
Cope with inflation
You don’t have protection with savings. Over time, the value of your money shrinks due to inflation. Prices typically increase in the future such that your purchasing power will diminish. Thus, to cope with inflation or hedge against it, you need financial flexibility.
Investing can mitigate inflation risk. If you have a higher return on investment, you don’t need to touch your original capital. Aside from producing cash flow, you’re accumulating wealth. It’s a two-pronged process that will ensure your financial well-being.
Consumer-defensive stock
If you have $10,000 savings, take 50% to invest in a high-yield consumer-defensive stock like Rogers Sugar (TSX:RSI). The share price is $4.95, while the dividend is a whopping 7.35%. The income you will generate is $367.50. Also, your money will compound to $10,162.26 in 10 years. The average interest rate on a savings account is not even one-fourth of Rogers’s yield.
Rogers Sugar isn’t doing poorly in the pandemic environment, although sugar volumes are lower due to the impact of COVID-19 on the food service sector. For the nine months ended June 27, 2020, total revenue grew 4.75% to $614.5 million versus the same period last year. Meanwhile, net earnings fell 29.5% to $22.5 million.
Income investors pick Rogers Sugar, because it’s a pure dividend play. While sugar is a slow-growth industry, the business is stable and enduring. Dividends should be safe too. In terms of stock performance, it’s in positive territory (+4.87% year-to-date gain).
Two birds with one stone
Inflation is a market force that erodes the value of your savings and alters your long-term financial goals. Investment income minimizes the impact while at the same time gives you more money to grow.
The post 2 Reasons Why it Is a Bad Idea to Save Your Money Instead of Investing it appeared first on The Motley Fool Canada.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.
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