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Is It a Good Idea To Save Money?

March 16, 2015 By Samantha Leave a Comment

There are plenty of reasons to save for a rainy day, especially if your income is low or average. If you don’t have a stable job but are paid commissions or bonuses or have a seasonal job, this is yet another reason to save to be financially independent. The unfortunate truth is that bad things and emergencies can happen to everyone.

Why Save Money

It is a good idea to have an emergency fund to meet unexpected expenses and pay for basic necessities in case of loss of income or loss of employment. At the same time, the decision to save or not also depends on the current economic situation. When rates are at historic lows, which is the current situation, savers are literally punished and pay to keep money in their checking and savings accounts. At the same time, inflation is eating away their savings and many choose to keep their money under the mattress.LOC27

Is Borrowing Better Than Saving

Again, this depends on the current economic situation and interest rates. In some cases, taking out a low rate loan is a cost effective solution and more people can afford to borrow. They have more cash to spend on everyday and big-ticket purchases and improved purchasing power results in higher inflation and economic growth. The recent drop in oil and gasoline prices is one of the main reasons for the current state of affairs. When the pace of inflation eases over a longer period and interest rates are still low, this is a good time to borrow at a low cost.

Is It Always Good to Have an Emergency Fund

This depends on your income level, whether you have additional sources of income, number of children and household members, your age and short- and long-term financial goals, retirement goals, and other factors. There are some arguments against having an emergency fund, and one is that most financial institutions which advertise savings accounts offer a low rate of return. In this case, having an emergency fund is a particularly bad idea if you hold multiple, high-interest debts. Debt balances sitting at 15, 20, or 30 percent will cost you dearly, regardless of the earn rate on your savings account. Holding cash in a savings account may make sense but this depends on the amount deposited, the earn rate, and the state of the economy. Many consumers opt for a savings account because of the fact that this is a liquid, low-risk product. There are other ways to invest free cash such as bonds, stocks, certificates of deposit, money market accounts and riskier investment strategies such as Forex trading. In general, consumers save money to meet unforeseen expenses, pay for home and car repairs, and other major repairs. It is also a good idea to have an emergency fund in case of a sudden job loss due to an accident or another unfortunate event. Many people save for retirement, but there are better ways to grow your money than opening a savings account. Some people also use their emergency fund to pay for vacations and to make a down payment for a vehicle or house but again, this depends on inflationary pressures and rates and this is not what emergency funds are meant for.

How to Make Sure Your Savings Are Not Eaten Away by Inflation

LOC26There is no straightforward answer to this question but basic investing tips can be of help. When inflation is high, your savings are menaced because interest rates are also low. Unless you are offered a high-interest savings account, the purchasing power of your money is steadily declining. One way to protect your savings against inflation is to take more risk with the goal of getting higher returns. Financial advisers recommend investment strategies that are medium-risk and bring higher returns. One option is to invest in inflation-bearing bonds and the best part is that you benefit from tax-free returns. The rate also increases over time. Another option is to invest in stock but this is a riskier solution for seasoned investors. You may want to look at alternatives, for example, stock and shares ISA which is one way to secure income from shares and stock. It is also a relatively safe investment vehicle that brings inflation-beating returns. Basically, this is a type of ISA that allows some degree of flexibility. The returns depend on the types of investments customers choose to buy. Some businesses pay regular dividends and offer the opportunity to get decent returns. There are other investment vehicles such as annuities, mutual funds, commodities, equity, and others. Other options to protect your savings against inflation include money market mutual funds, savings bonds, corporate stocks and bonds, state-sponsored tuition plans, and education IRAs. You can also look into investment vehicles such as treasury notes, bills, and other securities and exchange-traded funds.

Conclusion

Whether it is a good idea to save or borrow depends on many factors, including your personal and financial circumstances and the state of the economy and global financial trends. One way to protect your savings when inflation is high is to use different investment strategies such as dollar cost averaging, portfolio diversification, and allocation of investments. Some investment instruments are safe and low-risk but bring low returns. They are also more liquid meaning that customers are allowed to withdraw their money without penalty and at any time. Other instruments are riskier or less liquid and offer higher returns. Whether it is a good idea to save depends on your financial goals, i.e. early retirement, buying a new vehicle, a college fund for your kids, and so on. Think of your mid-term and short-term goals as well (holiday purchases, travel, paying off debt faster, etc.) Saving can also help become financial independent and live a stress-free life.

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