Saving Money – How Safe Are Your Savings From These 5 Risks?

Saving money for a rainy day is considered good practice. How much money you need to save will however vary from one person to another, since the definition of a ‘rainy day’ will not be the same for everyone.

Like everything else in life, there are risks associated with saving money.

In this article, we will look at 5 risks that have the potential to wipe out the savings base you may be trying to build.

1.  Inflation

Inflation is a hidden cost that erodes the value of your cash savings.

This is why it is a bad idea to keep cash hidden away somewhere ‘safe’ for a long period of time.

Since money loses value over time, interest rates are designed to guard against this risk.

However, the rate of interest paid on savings is not always in line with the prevailing rate of inflation.

It therefore pays to know the annual inflation rate (the rate at which your money loses value over a year) before you can know whether the interest rate you are being offered on your savings is competitive.

2.  Poor investment decisions

Many people find it hard to save money.

Those who are able to overcome this hurdle are not always insulated from loss arising out of poor investment decisions.

This is because investing money requires a separate skill set from saving.

In most cases, the return you get on saving money is very low compared to what you can get from investing.

Attempting to invest money without understanding the basics is a very expensive mistake.  Do your homework thoroughly.

3.  Other people’s problems

In society, there will always be people who do not see the need to save.

Strange enough the moment they are broke, they do not seem to have trouble seeking help from diligent savers.

People who do not know how to save money usually make very bad borrowers.

This does not mean you should not help those in need, but just be sure to proceed with caution.

4.  Your  level of  patience

If you are not clear on why you are saving money, the temptation to spend it all will increase as your savings grow.

This is because you will quickly realize that you have the financial capacity to enjoy a few luxuries you once thought were beyond your reach.

If you are the kind of person who is driven to spend money when you are sad, angry or depressed, you have to work on developing the discipline to keep your savings out of the picture.

You may also find yourself with a sudden need for cash in an emergency. Be sure to invest the excess beyond what you consider to be your emergency fund.

5.  Get-Rich-Quick scams

Well meaning people from all walks of life fall for scams.

This is mainly because scammers focus on two of the most powerful emotions known to man; fear and greed.

The unsuspecting victims are usually looking for a quick return with little or no work.

In most cases, these scams are very sound on paper and given all the outrageous claims, they are often too good to be true.

When your decisions are based on fear and greed, reasoning and common sense tend to vanish, so be cautious.

In spite of these risks, saving money is a very important habit to develop if you want to improve your financial position.

Knowing the various risks that can set you back is a crucial first step. Keep these risks in mind when exploring the different options you can use to build a savings fund.