We often hear we should save, but why? What is the value of saving and why is it so important?
When we talk about saving, what do we mean?
Saving is not spending money today, so that we can use it at some future point in time.
Why should we save?
Most people would say that they should save more, but why? What is the real purpose of saving?
If asked directly why they should save, then some typical answers might include: “because it’s a sensible thing to do”, or “because I need to provide for retirement”. We don’t think these answers are very convincing.
There is also an idea that delaying consumption, or gratification, is somehow admirable, and therefore putting money aside and saving for the future must be a good thing to do – remember: “patience is a virtue…” However, this is nonsense. Saving should not be a virtuous decision; instead it is simply a question of how much should we put aside today (based on our personal circumstances), to have the best chance of meeting our goals and aspirations?
Our intention here is to clearly demonstrate and explain the value of saving. We want to give a proper answer to “why should we save?”
Key reasons to save:
- Contingency planning – we need easy access to some funds to cover unexpected costs, or to deal with periods of lower income (e.g., temporary unemployment); [link article to contingency planning]
- To meet specific goals – maybe we want to fund a deposit on a house, or pay for a wedding, or a new car – all of which typically require funding over a longer period of time;
- To enjoy retirement – to achieve a desired standard of living in retirement;
- To get ahead financially – to make the money you have today work for you in the best way possible
As important as the other reasons are, we think reason (iv) is particularly appealing. If we build up some financial resources, these can be invested and can begin to make money for us. Then the money that these investments make can itself be put to work. This snowball effect (compounding link) is incredibly powerful.
One of our primary objectives here is to demonstrate the different ways in which you can make your financial resources work for you.
How much should we save?
This is a very personal thing, depending on your unique set of circumstances. In order to make the right choice, it is important to have an understanding of (i) the purpose of saving, (ii) the benefits and trade-offs of doing so, and (iii) how your personal situation tips the balance one way or the other.
Where should we save?
In addition to recognising why you should save, it is equally important (if not more so) to understand how best to save.
Here we talk about saving in the more general sense, in the vast majority of cases much better outcomes can be achieved by investing money into non-cash products.
So what do we mean by investing? To start please see our introductory guide to investing [link]
And our discussion of inflation and compound interest [link]
Asset allocation [link]