When it comes to our money, we all want to save more – and of course, we all want to be wealthy.
How are wealth and savings related? The intrinsic relationship is much more complex than we might think.
At its most basic form, you’d believe that the more you save, the more wealth you will have – but that’s not entirely true.
This guide will have a look a little more closely at this relationship and find out how these two entities relate to each other.
Read on to learn more.
How Are Wealth And Savings Related?
To fully understand these two things, we must first understand what they both mean. Below, we’ve explained some key financial terms and what they mean.
Savings
Savings is literally the amount of money you have managed to save and accumulate over time.
Savings are a very important part of your financial health, and they can play a big role in your overall wealth too.
While savings contribute to wealth, they are not the sole contributors. In fact, some wealthy people do not attribute their wealth to their savings figure at all.
Wealth
Wealth at its most basic level is how “well off” you are financially, and those with a large amount of wealth are known as the wealthy.
However, wealth is not simply a product of savings. It can be attributed to an amalgamation of savings, investments, inheritance, and earnings (or income).
Income
Your income refers to the money you make. This is usually the figure that comes from your salary/wages from your work.
However, it’s also important to note that income can also be attributed to the money earned from investments, particularly if these are on a regular basis.
What Contributes To Wealth And How Are Savings Involved?
As we mentioned, savings can contribute to someone’s overall wealth – but this is not the full story. We’ve identified the following contributors to someone’s wealth:
- Savings and savings rate (including interest and time)
- Investments and savvy financial planning, such as IRA’s
- Inheritance
- Earnings such as income
- Reduced spending habits
Let’s look at these more closely now and work out how much savings are related to wealth.
Savings
The amount of money you can save and the amount of money you do save will of course play into your wealth. However, there’s more to it than this.
As a contributing factor to the amount of money you can actually comfortably save, you will be examining your spending habits, and this will likely play into your income.
In other words, the more you earn – the more you in theory can save. But as we know, this isn’t always the case.
One key aspect to savings contributing to your wealth is first the amount of money you are saving, but secondly – and perhaps most importantly – the savings rate you are getting.
A savings rate refers to the interest rate your savings account pays you back. This rate is often fixed when you open a savings account, but many accounts have variable interest rates.
Depending on how financially savvy you are, you will be able to utilize these savings rates and maximize your saving potential.
As a result, you should be able to see a much larger return on your savings, and this will contribute to your wealth figure.
Investments And Savvy Planning
Investments can play a huge role in your wealth. However, most of us will be aware that investments come at a large level of risk – and generally speaking, these investments can pay dividends on larger investments, but not necessarily on smaller ones.
However, savvy planning on investments such as IRAs or fixed-rate investment bonds can yield big results and contribute much more to your wealth.
The amount of money you can invest will depend on the same factors – your income, your savings, and your spending habits.
Inheritance
Some wealthy people can attribute their wealth not necessarily to their savings but to their ancestors’ or other connections’ savings and financial ingenuity.
Inheritance can be massive and depending on what you’re receiving as an inheritance will depend on your newfound wealth.
This can then play into what you can save and overall can affect your savings figure.
Earnings And Income
This figure is for most people going to be the biggest contributor to their savings and overall wealth.
Once again, in theory – if you earn more, you should be able to save more, and thus be more wealthy.
Reduced Spending Habits
You will be able to accumulate more wealth by reducing the amount of money you spend.
This figure is due to your spending habits such as your hobbies, family, housing, and generally your way of life.
Most people find that if they can reduce their spending habits, they can move this money to their savings account instead – and as a result, accumulate more money and increase their wealth.
So What Does All This Tell Us?
We can see from this how wealth and savings are related, along with how income and expenditure are related.
Essentially, the way in which someone can save can contribute to their wealth figure, but this isn’t always the case.
As a general rule though, we can say that this would be one of the biggest factors in someone’s wealth attribution.
Can I Increase My Wealth Through Savings?
You can – but as we’ve seen, it’s not always that simple. It will be through a combination of your ability to earn, save and spend less – along with some extras such as inheritance and savvy investment opportunities.
The Bottom Line
Wealth and savings have a complex relationship, but they are certainly related.
The important thing to remember is that if you want to increase your wealth, you could start by examining how you save.
If anyone asks you how are wealth and savings related, you can give them some useful information.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
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