SAVING MONEY WILL ALWAYS BE THE BEDROCK OF YOUR FINANCIAL WELL-BEING
A new year is just around the corner and once again people the world over will be looking at setting new goals. Resolutions around finances and money often top the list. Within such lists, surveys often find that people want to prioritize paying down debt. It is a noble and worthwhile financial goal to pursue, no matter the time of year. Implicit in this goal is the reality that many people are in too much debt and don’t have enough money saved up.
Saving went out of style a long time ago. There doesn’t seem to be a better time than now to make saving money in vogue again. The financial devastation caused by COVID-19 to so many business owners and workers, should have made the importance of this clear by now.
A WORLD DROWNING IN DEBT
To my knowledge, I’m not aware of a society that has been able to borrow its way to prosperity, in any enduring way. The world is awash in debt. At the household, corporate and government levels, debt is at incredibly high levels. This is clear and apparent when looking at things in an historical context. Borrowing large sums of money has somehow become normalized, especially in the most recent years. We had become desensitized to billions in government debt and now the same is happening at figures in the trillions. Perhaps it’s because most people simply can’t wrap their minds around or conceptualize such staggering sums.
Bad debt is what triggered defaults during the 2007–2008 Great Financial Crisis. And to solve a debt problem, what did central banks and governments do? That’s right, print and borrow ever more unprecedented amounts of money. This became even more apparent when COVID-19 swept across the world.
LOW SAVINGS RATES
The longer term trend lines for personal savings rates in North America have been on the decline for a long time now. Culturally, at some point in the past 30–40 years, instant gratification superseded delayed gratification. That is to say that people in past generations seemed to have a greater propensity to save enough money to pay for things in full, or in cash (before the digitization of money). As incomes (adjusted for inflation) have stagnated or declined for about the past 40 years for typical workers, people substituted ever greater amounts of debt to purchase things that they in all honesty could no longer truly afford.
It was partly because of generous pandemic income support from the government, recently, that there was an uptick in savings rates. In addition, given recent lockdowns, people had an inability to freely go out and about to spend on things like sporting events, concerts and leisure travel. I am assuming the recent savings bump will quickly recede as people revert to old habits, once the pandemic finally fades away.
LIVING BEYOND OUR MEANS
Debt was used by many people to fund a lifestyle gap that could no longer be maintained on income alone. This remains true today. Once upon a time, installments or payments were reserved for large purchases like a home or automobile. However, payment schemes soon extended further down the consumer goods chain to things like furniture, appliances and even electronics. Even if one didn’t have the funds to fully pay for such goods upfront, retailers made it incredibly enticing and easy to attain credit. Incentives like delayed first payments and/or low interest payments made it so that gratification no longer had to be put off. The dopamine from retail therapy became generously available to the masses, seemingly on demand.
In the context of what has been described above, somewhere along the way, society lost its aversion to debt. Savings somehow went out of style. Very low or record low interest rates on savings shaped financial habits a great deal. Miniscule savings returns (i.e. low deposit rates) naturally dimmed the incentive to save. This was likely by design and the intent of central banks. For example, since about 70% of the US economy consists of consumer spending, the government wants and needs “the consumer” to keep spending. It’s good for the economy, they say. But is spending all that one earns (and then some through borrowing) actually good for the individual, families or households?
FINANCIAL REPRESSION
Artificially low interest rates have also led many to venture further out on the risk curve to find a reasonable rate of return on their money. It has encouraged people to spend and gamble, rather than save and invest conservatively. Retired people, especially those on fixed incomes, are especially feeling the squeeze. With inflation running high, and interest rates on savings nearly zero, purchasing power gets eroded. Fast. This can quickly lead to a decline in the standard of living, as we are witnessing today.
Still, cash is not trash. Some financial advisors would suggest that to be true. But it’s not. It’s in their best interest to have their clients fully invested in financial products that they can collect fees or commissions on. They argue that holding cash is foolish since inflation eats away at the purchasing power of your money. Accumulate a few thousand bucks in your bank account and it won’t be long before a bank employee calls you to say that “you should get your money working”. Book an appointment with their financial advisor, to discuss product options, they will suggest. But, savings, as they always have, play an important role in one’s financial condition and future.
Considering the above, sometimes out of desperation and sometimes because of access to “cheap” or “free” credit, people become reckless with money. They come to believe that “there is no alternative” (TINA as they like to say in the financial media) to taking speculative risks in the stock market, and more recently the crypto space. Or they may overbid for already overpriced and expensive real estate, if they can get approved for a mortgage.
Any meaningful correction in the aforementioned markets could have devastating and long-lasting negative consequences. Indeed, those participants close to or already in retirement, may never recover from life-altering losses. And so it is that savings still has an important role in financial well-being, regardless of outrageously manipulated interest/deposit rates.
THE BENEFITS OF SAVINGS
I believe that as working people, it is vital to our financial well-being, that we remind ourselves of the personal benefits of saving our hard-earned money. We need to first set aside a portion of current income and not use all of it for consumption. Rather, we need to set aside savings for the constructive future use of it, such as prudent investing.
Traditionally, people have been told to automatically save and set aside 10% of their net pay, right off the top. I would suggest that in the low interest rate world we continue to find ourselves in, a minimum target of 15–20% may be necessary. That is because there is no longer a meaningful return that can be safely generated on our savings, at the bank or credit union. Money doesn’t safely work for us, the way it once did. This is at the heart of the financial repression many are struggling with.
Still, we must not lose sight of the value in having savings. Below is a list of several of the benefits inherent in saving a portion of every pay-check or direct deposit we receive for our labor.
In no particular order, saving money helps by providing:
- Peace of mind and security knowing you have a cash cushion
- Emotional, psychological and physical well-being
- The option to jump on potentially good wealth-building investment opportunities, whenever they may arise
- A safety net or fallback position that can allow one to take risks or try new things, such as starting a business
- An option to get your money working for you
- Time needed off from work and the uninterrupted ability to cover your bills and expenses
- The financial flexibility to transition between jobs or careers
- An emergency fund for unexpected expenses (i.e. expensive car or home repairs, healthcare needs, having to take an emergency trip etc.)
- Less reliance on debt for big purchases like buying a car, home, furniture, appliances, major electronics, tuition etc.
- An ability to avoid taking on heavy debt during a tough time, that could make a bad situation worse
I really hope that central banks and governments wise up to the fact that the citizenry should be incentivized to save. They can start by stopping their madness of artificially suppressing interest rates, in a way that punishes the prudent savers among us. It is sending the wrong financial signals in shaping consumer behaviour. Allowing for the natural forces of the markets to provide a reasonable yield and income from savings would be a useful pivot. The low-risk preservation of money should be encouraged. Savings should serve as the concrete for the financial footings on which productive investments for wealth creation can be made, to advance the prosperity of individuals and society as a whole.