This week has been dubbed American Saves Week by the Consumer Federation of America, a non-profit organization founded in 1968 “to advance the consumer interest through research, advocacy, and education,” according to the organization’s website. All this week, the group and many partners in the non-profit world, in the financial industry, and among publishers will be promoting concepts related to responsible care of personal finances.
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Although I had always been aware of the importance of saving money — whether for emergencies, for the distant future, or for upcoming purchases — my problem as a kid and a young adult was that I thought I wasn’t earning enough money to save. And if you looked at my cash flow statement at the time, you wouldn’t have been able to argue with that.
My first permanent job out of college was with a non-profit organization 66 miles from my home, up the New Jersey Turnpike. It required travel over the weekends, and there wasn’t much reimbursement for those expenses. Considering rent and other basic expenses, my low salary was barely enough to cover my ability to maintain the job. If I were to take into account the number of hours I worked, I would be too scared to determine my effective hourly rate.
All things aside, it could have been a very satisfying job, under other circumstances. But it wasn’t, and I suffered mentally and financially. Nevertheless, I started contributing just a little bit into savings. Although I thought I wasn’t earning enough money to save, I found occasional opportunities to choose to deposit rather than spend. I made some sacrifices. I moved closer to the job. I did what I could to start moving in the right direction, even if slowly.
I was part of the 64 percent of Americans who, according to the National Foundation for Credit Counseling, wouldn’t be able to come up with $1,000 to pay for an unexpected expense without neglecting responsibilities or going into debt.
The best changes came after I left that job. I found myself a less stimulating but more financially responsible position, learned more about personal finance, and found out what it was like to be able to save money regularly rather than haphazardly.
When you have a positive cash flow every month and you are out of debt, every dollar you earn goes to you — not to the credit card companies, not to the banks’ profit lines. Sure, you still have expenses, but when you have money left over after your basic needs are covered, you have the choice of saving or spending without going into debt. And having that choice is freedom; everything else is a form of financial slavery (or indenture).
Savers don’t always have it easy. The government is charged with the task of stimulating the economy, and the widely accepted theory is that the economy grows more when people spend compared to when they save. At the same time, in difficult economic environments when people are concerned about the security of their jobs and paychecks, people are inclined to save money for financial protection.
Consumers who put money into savings accounts while the economy was running smoothly were rewarded with interest rates as high as 5 percent, with bonus rates even higher. This was almost double the rate of inflation. In other words, you could hold your money in a bank account for a year, and it would be “worth” more in terms of purchasing power than it was worth when you deposited the funds. Banks were willing to pay high rates because they were able to use savers’ money to lend to other customers, many of whom were making so much money in the real estate market, flipping houses for example, that the banks were able to sell expensive loans.
In today’s environment, the banks aren’t writing as many loans, and the financial industry is flowing with low-cost money from the Federal Reserve. There’s no need to pay customers high interest rates on savings accounts because the banks have everything they need at government-inspired low rates.
In this economic situation, there are some financial experts who are saying this is a good time for borrowers, not savers. Borrowers are being rewarded with low rates, particularly in the real estate market. This is supposed to inspire the real estate market, and then eventually the stock market and the economy as a whole, but two things are still keeping this recovery slow: the unemployment rate is still higher than it’s been during better economic times and banks are more stingy with loan qualifications than they were during happier periods. As a result, people don’t feel great about their jobs and potential for future income. So while we may be out of the Great Recession, we don’t feel fully recovered.
Without the financial reward of savings interest rates above inflation, why still save? Why not take advantage of low interest rates and buy assets that have a good chance of appreciating in value? I have some thoughts about my motivation, which I’ll share here. What motivates you to continue saving without the financial reward?
Here’s why I save:
- It’s not all about the interest. My savings accounts may be part of my overall financial strategy, but it’s not an investment in which I expect to earn money. I don’t need to earn interest to save, though the higher the interest, the better. The purpose of saving money is partly for emergencies. Knowing I can get to my savings quickly and that it won’t lose value (except for inflation) keeps at least some of my money in a bank account.
- Saving provides financial freedom. If you want to buy a $1,000 television but you have to put it on your credit card, you may end up paying $1,500 or more for it. By the time you’ve made your last payment, the television might only be worth $500 or less! That’s not as good of an example as something that happened to me recently. My mother was in the hospital on the other side of the country; because I had savings set aside, I could buy a flight at the last minute. Normally I’d only buy airplane tickets in advance to avoid high prices, but that’s not always possible. The flexibility to do what I need to do, when I need to do it, without needing to ask whether it would create a financial hardship, is the kind of freedom provided by saving.
- Saving makes me feel good. I have a fully-funded emergency plan. It involves more than just cash or savings accounts. It has tiered access, and is more helpful and more rewarding than just an emergency fund. Being protected from emergencies in this matter makes me feel secure in knowing that I’m unlikely to face an unexpected expense that I can’t handle.
- I can take more risk in other areas of my life. With a strong back-up plan and healthy human capital, I can afford to take some risks with my life. I quit my regular job to work for myself a few years ago, but only after I was secure with my finances. I could move out of my apartment, absorbing the expenses, if it makes sense for me to move. I’m able to diversify my assets across a broad range of investments, with a meaningful investment in many thanks to my savings.
Perhaps the day will return when savers are rewarded with higher interest rates, but I’m not counting on that happening any time soon. If not for earning interest, why do you save money?
Updated January 2, 2018 and originally published February 25, 2013.