It is close to midnight on December 29, 1972, and Eastern Air Lines Flight 401 is making its final approach to Miami International Airport. 163 passengers are onboard, most hoping to enjoy their new year in sunny Miami.
As it approaches the airport, the landing wheels are lowered and locked into position. At this point, the captain notices something amiss: the green light linked to the landing wheels has failed to light up. This could mean one of two things: Either the wheels have failed to lock into position, or the light is faulty. The pilots report the situation to Air Traffic Control, who orders the plane to circle back and try their descent again.
At this point, the pilot and co-pilot fixate on the light. They take it out of its fitting, blow on it to remove dust, and try to jam it back. Their conversation goes back and forth as they try to figure out what the fault is. They become so fixated on the light, that they fail to notice the 80-pound gorilla in their midst.
The gorilla, in this case, is the fact that their autopilot is disengaged and that they are rapidly losing altitude. They don’t notice that they are dropping rapidly because it is a moonless night and they can’t see the horizon. The altitude warning alarm rings through the cockpit and the altitude meter is dropping crazily, though neither pilot notices. They are too fixated on the light. Only when the aircraft is 7 seconds to impact, do the pilots realize that something is very wrong. They take evasive action, but it’s too late. The plane crashes, killing 101 people.
Crash investigators later found that the wheels had indeed locked into place – it was the light that was faulty. “The crash occurred due to the failure of a $12 piece of kit,” as one journalist pointed out. However, the true cause of the crash was deeper than that – it was the pilots’ fixation on one particular problem, which blinded them from the true danger they were in.*
*story taken from Bounce by Matthew Syed
What other gorillas are you failing to see in your life?
Like the pilots who were overfocused on the green landing gear light, most people are fixated on one goal when it comes to personal finance: retirement. They believe that in order to retire, they need to hoard as much cash as possible, starting now. But they fail to realize the huge gorilla charging towards their bank accounts: inflation.
Two posts ago, I wrote about how inflation would slowly but surely destroy the buying power of your savings. If you’re young, letting your cash sit in your bank account (or in your fixed deposits / CPF / mattress) is like putting it in a nest of termites: it’ll eventually get eaten up.
So here’s my advice when it comes to inflation: Don’t save for retirement.
Say what?
Hear me out for a second. If you’re young and wild and free, there are other, more important things you should be focusing your attention on. Instead of saving up for “retirement” and getting a lot less bang for your buck, there are three more useful things you should be directing your money towards:
1.Save for assets
The best way to tackle the inflation gorilla is to put your money into assets that will grow faster than inflation: Stocks and real estate. Stocks are the most accessible because they don’t require a huge cash outlay, they’re easy to understand, and if you live in Singapore, they’re tax-free. Woot woot! Real estate is pretty nifty too, if you can afford the huge downpayment (or if you can’t afford the huge downpayment, you can also look into REITs – more on that later).
The biggest bonus of all is that if you plough your cash into assets that exceed inflation, you will, in fact, be prepping yourself for retirement.
2. Save for life chapters
Here, I’m talking about big, life chapters that you were planning on spending on regardless of what happens. I’m talking about your wedding, your first house, and your daughter’s upcoming college fees. If any of these are going to be happening within the next 10 years, then you should be saving up for them. Don’t act as if you didn’t know they were coming: If you know you’ll be getting married in 3 years, you should be saving up for your hypothetical $30,000 banquet and $15,000 ring… now.
A caveat: I’m not talking about cars, or vacations, or that new washing machine, that you “know” you’re going to spend on anyway. I’m talking about the big, necessary, life chapters here, people.
3. Save for emergencies
Sh*t happens. You’ll need cash to deal with it. If something bad happens, (like losing your job) the last thing you want is to be dipping into your investments to pay for your meals. If you don’t have an emergency fund of 3 months of income parked in an easily accessible bank account, then you should totally start saving up for one now.
In short…
Don’t bother saving for retirement – inflation will render your efforts futile. Other than cash set aside for emergencies and stuff you’re going to spend on within the next 10 years, everything else should be directed towards assets – Assets that keep pace with inflation. If an insurance agent / banker tries to sell you a fancy schmancy 50-year savings plan, run as fast as you can.
Don’t get too fixated on the wrong things. Just because personal finance “experts” tell you that you should be saving for retirement, doesn’t mean that you should be blindly stuffing cash into a bank account. Keep an eye out for the inflation gorilla in your midst, and take action to deal with it.
PS: the topic for this post came from a friend who replied to my previous post on spending money. To everyone reading this, keep the comments coming! They totally give me the inspiration for future blog posts.
As a young person, what do you think about the 3 ways you should be putting your money towards, instead of saving for retirement? Leave a comment, or drop me an email at [email protected]. Hope to hear from you soon
