We’ve all been taught to save, and there’s comfort in watching your bank account balance slowly tick up. But when it comes to building real wealth, relying on a bank account is like building a sandcastle too close to the shore—each wave of inflation washes away some of your progress, and before you know it, your efforts don’t amount to much.
The Problem with Bank Accounts
Bank accounts feel safe, and they are—for short-term savings or emergency funds.
But they come with a major pitfall: low interest rates. Even high-yield savings accounts which typically provide 1-2% returns are far too low to keep up with inflation or build meaningful wealth.
While stashing your cash in a bank account might seem like a safe way to build wealth, the real threat is inflation, which averages around 2-3% annually. This means your money is actually losing purchasing power over time.
The Impact of Low Interest Rates
Low interest rates are great for borrowers but terrible for savers.
Central banks keep rates low to encourage spending and borrowing, which stimulates economic growth.
Unfortunately, for those looking to grow their wealth, these low rates make it almost impossible to see meaningful gains from savings alone.
Factoring in inflation, which is typically 2-3% per annum, your savings will have less purchasing power over time compared to when you deposited it.
Understanding Inflation
Every year, more money is released into circulation by the Reserve Bank of Australia. This doesn’t increase the total value of the economy—it simply dilutes the value of each dollar.
That’s why prices rise over time. It’s why something that cost $10 ten years ago might cost $15 today.
It’s not that things are getting more expensive; it’s that the purchasing power of your money is shrinking.
Remember when milk was $1 Now it’s more than double that, not because milk is worth more, but because each dollar is worth less.
That’s what inflation is – the rising cost of goods and services over time.
In simple terms, inflation erodes the value of money.
This means the purchasing power of your money decreases over time—$1 today won’t buy what it used to.
Why Relying on Savings Alone is Risky
Let’s say you’ve saved $10,000 in a high-yield account earning 1.5% interest. After a year, you’ll have $10,150. But if inflation is 3%, the purchasing power of that money has dropped.
You may have more dollars (the nominal value), but what really matters is the real value. Over time, this gap widens, and eventually, your savings buy significantly less than they did before.
Essentially, your money is shrinking in value.
At a 3% inflation rate, it takes about 20 years for your money’s real value to halve.
This is why relying on savings alone isn’t a long-term wealth-building strategy.
You need your money to grow faster than inflation to retain or increase its value.
The Solution: Investing
To truly grow your wealth and protect it from inflation, saving alone won’t cut it—you need to find something that has a higher return.
That’s where investing comes in.
Investing allows your money to work for you, providing returns that go beyond what savings accounts can offer.
If you want to be able to live off your money in the long run, you need something that consistently grows your wealth. What exactly that is will be explored throughout this mini-series.
But of all the things investing is, let me tell you what it isn’t.
Buying hundreds of Beanie Babies during the 90s craze, hoping they’ll “fund your retirement” in 20 years time. (Spoiler: they didn’t, and now you’re just a weirdo with a bunch of teddies.)
