Why 20% Savings Can Make You Rich Over Time

 

In my previous article, I mentioned that consistently saving just 20% of your income can make you wealthy over time. However, it's not just about saving—where you put that money matters. Savings generally fall into two broad categories:

  1. Depreciating Assets
  2. Appreciating Assets

Let’s break this down.

1. Depreciating Assets – These Won’t Make You Rich

Depreciating assets are things that lose value over time. They may satisfy your ego or offer short-term comfort, but they do not contribute to long-term wealth creation. A common example is buying a car.

I’ve seen many families make this mistake—buying a car not out of necessity, but to keep up appearances, often without understanding the financial impact. While owning a car might offer convenience and social satisfaction, it can actually make you poorer in the long run, especially if it's not used wisely.

Consider the hidden costs:

  • EMI (loan repayment)
  • Annual insurance premiums
  • Regular maintenance and repairs
  • Depreciation in resale value

All these factors make a car a liability, not an asset, unless it is directly contributing to income generation.

To be clear, I’m not against buying a car. But ideally, you should purchase such liabilities only when they are funded by passive income—not your primary salary or business earnings.

What Is Passive Income?

Passive income is money earned without active involvement. This includes:

  • Interest on capital
  • Dividends from shares
  • Rental income from properties or commercial spaces
  • Earnings from side services or royalties

If you can cover your liabilities—like a car—with passive income, then it’s a sustainable financial decision.

2. Appreciating Assets – The Path to Wealth

On the other hand, appreciating assets are investments that grow in value over time, building your wealth in the process. These include:

  • Real estate
  • Equity shares
  • Mutual funds
  • ETFs (Exchange-Traded Funds)

Investing in these types of assets can compound your wealth over the years, providing both capital appreciation and, in many cases, passive income as well.

Final Thoughts

True wealth comes not just from how much you earn, but how wisely you save and invest. Avoid tying up your money in things that lose value over time unless they are essential and backed by passive income. Focus on acquiring appreciating assets that build your financial future.

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