The importance of saving is drilled into us from a very young age, from allowances that we had to manage over a fixed timed period to the lectures when we inevitably spend it all in record time. The urge to spend what we have on present satisfaction over committing it to an unforeseen future cannot be dismissed as a mere lack of discipline either. It goes against millions of years of evolution to save for a future that the brain can simply not envisage, which means that it takes a lot of work to maintain a saving attitude. Work that sometimes might be beyond our capacity to accomplish, especially when we are stressed. Falling behind on saving even by a few years after first starting to work leaves many feeling that it is simply too late to start saving at all.
On the other hand, the economic climate we live in is not conducive to helping us achieve this saving mindset either. This is because of the unprecedented levels of inflation that the world is living through today. Inflation has the power to diminish the value of savings. Consumer price indices increased to 9.1% in June in the UK for example, which is the highest it has been in forty years. According to current forecasts, this is expected to continue into the double digits in the coming months. This effect on savings is twofold. For one, inflation reduces the purchasing power of your income – making it difficult to put aside anything for the future at all. On the other hand, it also diminishes the purchasing power of our savings, lessening its value over time. For someone new to saving, this may make it seem like they were born too late to start saving in any case.
So how do we mitigate this situation?
Simply opting not to save is not an option. The value of the resources we have is volatile, and savings are vital to mitigate any unforeseen expenses that might occur. It could also be necessary to fund the purchases and experiences that enrich or increase the quality of your life. Ultimately, savings have little to do with the amount you do end up saving – it has to do with giving yourself more options, and more flexibility in your life without being made a financial prisoner within the economic system. Seen in this way, it’s never too early or too late to start saving. Every little saved makes you less and less of a prisoner, as it gives you more freedom, provides financial security, and enables you to take calculated risks.
All this might give you the mental bolstering you need to start saving, but is there a way to mitigate the financial and economic effects of inflation?
Saving, inflation, and investing
Governments across the world are trying to mitigate the effects of inflation by raising interest rates – good news for everyone thinking to start saving. However, choosing the option to save is simply not a matter of choosing a savings account that offers the highest interest rate. The interest rate of your savings option has to be higher than the prevailing inflation rates for your savings to even make sense. Investment options typically offer higher returns than savings accounts. However, investing and saving are two different things, and come with their own advantages and disadvantages. The best option to take depends on your requirements.
Saving involves depositing your money in a bank account where the value of money will grow according to the interest rate. However, the interest rate should be more than the inflation rate to ensure that the purchasing value of our money does not actually decrease over time. On the other hand, you also have the option of investing your money in an option that offers a higher growth rate than prevailing interest rates. The returns on certain investments may actually be higher than inflation rates. However, it is important to bear in mind that the higher rewards of investing come hand in hand with higher risk rates as well. Investing generally involves options such as investing in publicly traded company shares, private business ventures, and the like.
Making a choice between saving and investing
Setting goals and prioritising them
Any effort to decide what you want to do with your money depends primarily on the goals you have set for your money. When it comes to setting these goals, it pays to have more detailed goals than just saying that your goal is to save an X amount of money by the time you are Y years old. Goals can be many and varied, such as retirement funds, travel funds, major purchases, travel goals, emergency funds, and the like. Setting goals is also not about picking one over the other – all the goals you feel are essential for your happiness. What resources you have in excess of your daily expenditure should be divided among these in proportion to how important the goals are to you.
Long-term vs. short-term goals
Long-term financial goals give you the freedom to tie down your funds in an investment. On the other hand, short-term goals do not allow for this same flexibility, which is why saving would be a better option. Investing is also more suitable for long-term goals because there is a longer time frame to smooth over short-term fluctuations in the value of the investment. Such short-term fluctuations would eat into your funds if you choose to invest in order to fund your short-term goals. It makes sense therefore to choose between saving and investing depending on the goals assigned to your funds. This would have the added advantage of diversifying your portfolio risk.
| Investing | Saving |
| Longer time frames make for higher returns on investments. | Savings allow for greater flexibility in liquidity, as it can be accessed without a loss. |
| Investing in anything involves some level of inherent risk, which puts your funds in jeopardy. | Savings are less exposed to market risks and are insured by the government up to a certain extent. |
| Withdrawing your money too early may result in lost income or in penalties. | Savings do not offer the same rates of return that investments do. |
| Ability to capitalise on market gains. | Less exposure to market gains. |
It’s never too late to start saving for the future. Saving alone is an investment in the future. The manner in which you choose to save offers different risks and rewards. Whatever path
you choose to take, setting aside for the future helps you achieve the kind of future you envision for yourself. Be it travelling goals, relationships, or your own health and well-being, working on your savings habits sets you up to achieve them in the future.
Thinking about saving can never be too early – and actually starting saving can never come too late. Having a well-paid fund for emergencies will also lessen the mental strain for the future and soothe your anxiety about what’s to come. There are many theories for savings that various publications advocate for – it is best to treat these as guidelines instead of feeling fettered by them and allowing the fear of failure to take hold. Starting as early on as possible allows for a longer time frame to save in of course, which means there would be more money set aside for the future. However, there still are ways in which you can compound your savings, should you be willing to set time aside to explore them.
(Theruni Liyanage)