Around the world consumers have accumulated an extra US$5.5 trillion of savings since the pandemic began – which is equivalent to 6% of world output – and are becoming increasingly optimistic about the economic outlook, according to ratings agency Moody’s.
While the past 16 months has been a time of great financial worry and insecurity for many households, others have managed to stockpile more savings than they usually would, because of the lack of services, travel and leisure activities on which to spend their incomes.
We can expect this trend to be especially acute in parts of Asia where there’s a traditionally strong savings culture, including Japan and China.
For example, according to the World Bank, pre-pandemic average household savings in North America were 4.9% and in the European Union 5%. Compare this with South Asia’s 20.8%, 16% for South Korea, 25.3% for China and 33.5% for Singapore.
But while it is certainly positive to have accumulated savings for the future, in order for the cash, and therefore purchasing power, not to be eroded over time in bank accounts offering ultra-low to zero interest, the money should be “put to work” through a sensible investment strategy.
The path to financial freedom isn’t reliant on building up capital only to spend it later.
Ideally, savings – apart from the emergency and/or rainy-day fund – should be put into an investment vehicle that provides you with an income through regular, decent returns. This should allow you not to have to touch your invested money or save again to the same levels as before.
There are also two super-powerful devices that a savings account would find it difficult to compete with.
First is compounding. Compounding is the ability of an asset to generate earnings, which are then reinvested or remain invested with the goal of generating their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Albert Einstein knew that compound interest had the potential to change lives. He said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Who am I to argue with a genius?
Second is debt leverage. Financial institutions will lend you money to buy assets and build your wealth.
According to a recent global deVere Group poll, most people who accumulated more savings over the pandemic are not planning to spend much of the additional cash.
When asked, “Are you likely to spend the majority of the extra money you have managed to save over the last 12 months?” 72% responded “no,” 16% said “yes” and 12% “did not know.”
The 550+ respondents are clients who currently reside in North America, the UK, Africa, the Middle East, East Asia, Australasia and Latin America.
As a financial adviser, I would hope that those who have so-called “excess savings” consider “excess investing.” After all, investing enables money to have the potential to grow more and faster than it could in almost any savings account.
Nigel Green founded deVere Group in 2002 from a single office in Hong Kong after discovering a niche market for expatriates in the financial services sector. Since then, it has grown to become one of the largest independent financial advisory organizations in the world with offices and clients across the globe.