This will be the first in a mini series, the ‘Why?’ series. The first is simply to try and answer the question “why should I save”? Not “should I invest?”, “should I pay off my mortgage or save?”, “is it worth hedging my investments with options?” or anything else complicated and convoluted. Let’s take it back the basics, people.
Simply, why should you save some of your income rather than pouring it into the greedy open mouths of the marketers and advertisers?
Some of us are naturally geared towards saving and the others are more geared towards spending. It’s just the way it is. The way we were brought up by our parents, our siblings, our friends, the role we take in different groups, any financial education we get etc, all have an impact on our spending or saving outlook.
Mr Z was not a natural saver. He worked for years to come out the other side with not much to his name other than a few scars and some good memories. Building wealth didn’t seem a particularly attractive trait. It looked self serving and pompous. Something to brag about at dinner parties or use as an excuse to look down on others.
Wealth for wealth’s sake has no place around my dinner table and either does excessive wealth, with it’s bitter foundations in fear, greed and selfishness.
When I was younger savings seemed to offer very little to me. I had no mortgage, no loans, no dependants to support and no girlfriend. If I lost my job I would get another one in whatever city the job required me to move to. Or I could always move back in with the parents, no big deal. In essence I thought that the impact of me losing my job and the probability so small that saving wasn’t worth the bother. There was probably a bit of rebelling against whatever I was told was good for me too. For what it is worth, past Mr Z, it would have been worth the bother.
So why did Mr Z move from being a spender, towards being a saver? We need to answer the question, “why save”?
Savings provide security. We live in a universe that is full to the brim with uncertainty and randomness. Chance plays a big part in all of our lives. Employers go bust. Recessions happen. Knees dislocate. Pigeons shit on our heads. Pipes burst and cars breakdown. Bad shit happens and to clatter through life unprepared is a recipe for disaster.
I do have
some emotions. Yet I struggle to understand the shocked and glum look on someone’s face when some of the aforementioned bad shit happens to them. An individual living pay check to pay check, with a mortgage, a sweet car on finance and an expensive lifestyle that cannot live for a single month without their pay check is an idiot. It takes just one event, the shockwaves of which tear through the financial fabric of their lives, causing devastation in all other areas of their life. Just a small amount of savings, say 3 months living expenses, provides a gargantuan amount of security compared to the person with nothing.
Incidentally I don’t really think of this as an ’emergency account’ as such, I hate the term and the idea. It should just be some liquid part of your savings that you can access easily should you need it.
With some savings built up you can take a burst pipe or being made redundant in your stride. With security comes happiness.
It promotes financial responsibility. Saving provides security and correlates with individuals beginning to think and act more financially responsibly. Sure, financial institutions have a obligation not to sell the public products they don’t need. And I agree 100% with this. There is a huge asymmetry of information in the finance industry which benefits financial institutions. They shouldn’t use it to sell people products they don’t understand (specifically the risks of said product) or don’t need. But it can and will happen.
At the same time, we can’t get around the fact that finance is and will be a part of all of our lives. We can’t pick and choose to be involved finance, like we can choose to play rugby or Warhammer. We are, unless we take very extreme measures, involved with it by default. So we should make sure we understand it. Perhaps not to the level that we are doing intellectual battle around the weaknesses inherent in the Black-Scholes assumptions with a bearded professor. But we should always take the time understand the products that we are buying.
People who took out 100% Loan-to-Value mortgages as large as they could and then defaulted when things went south have some part to blame, alongside the regulators and the banks. They didn’t take the responsibility themselves to understand the product, and more specifically the risks associated with it.
Saving is the first step towards financial responsibility and I believe that it generates an interest in finance. And responsibility follows that.
Saving means you avoid using credit. Using credit to purchase something is generally a bad idea. Taking out a loan to buy a car or using your credit card to buy that TV you can’t currently afford is a Personal Finance “oh-fucking-hell-no“.
By borrowing money, and not waiting a few short months until you afford it, you are forcing yourself to pay more for the same stuff. You are paying more. For the same thing.
For now, let’s ignore the question of whether or not you actually need said shit. Let’s assume that the TV you are looking buy is literally a life or death situation. It costs £800. If you buy it from your savings it costs…£800.
The alternative is to whack it on a credit card and pay the minimum, your lizard brain sees this as getting the TV now for the minimal cost of the monthly repayment. And that small monthly payment looks so inviting. With an interest rate of 19.99% and a minimum repayment of 1% (or £5 if larger) you’d end up paying £1,030 in interest and taking nearly 17 years to pay the thing off.
If you ever find yourself asking “why should I save?”, avoiding credit should be near the top of your answers.
It provides freedom. A growing savings balance brings a growing sense of freedom with it. What were once life or death one-off costs become an insignificant blip to your war chest of savings. The power of having a few years living expenses in savings means you don’t have to put up with your creepy boss peering at you over the cubicle or the random work requests at 11pm. You’re no longer there just for the monthly income. And that sense of freedom is some powerful stuff.
My savings have reached the point where I could take a couple of years off and still be fine, given my current typical monthly spend. This freedom fills you with power that not many others have. I am due to move teams internally over the next few months and I have told senior management that if I don’t end up in one of the teams I want to actually work for I will leave. It’s not a threat, it’s just with savings to fall back on I don’t need to work for the next couple of years doing something that doesn’t interest me.
So “why save money”? Because it gives you freedom and with that comes power to make your own choices. Having the freedom to be flexible enough to have some leverage over your own destiny is a feeling worth saving for.
It helps to avoid the consumer trap of lifestyle inflation. Without consciously saving, you are not consciously aware of your spending. Spending is a snide bastard that loves nothing more than diffusion. Left uncapped it will expand to whatever limits it is given.
As we put in the hard hours at work the eventual prize of payrises and promotions is bestowed upon us. For those of us not in the habit of saving this means more treats are bought because we are worth it. Upgrading bits of your life in response to an arbitrary thing like a payrise is a bizarre way to choose your path through life, but it’s how many of us live. A payrise can trigger a new car, a larger house or a spiffing new frock. This is all life style inflation, it’s really the cost of your lifestyle increasing just because your income has increased.
Ever hear anyone say some like “your spending just expands to eat up your payrise” as if it were a fact? Well, they are an idiot and incorrect.
Just by being in the act of saving you can cage lifestyle inflation before it runs rampant and it’s greedy attitude eats up all of your raises. Afterall, saving your payrises can have a dramatic effect on the growth of your savings. Whilst others relentlessly upgrade cars and electronics chasing the short lived high, you simply boost how much you are saving.
Saving begets more saving.
It’s satisfying seeing your savings grow. Yes, it is a little selfish and possibly a bit narcissistic but there is no doubt that it is fun to watch your savings grow month on month and year on year. Like amassing experience points in some computer game it is just satisfying.
Personally I found starting to save the hardest. Then at some point you cross over some limit and the savings start to mean something to you. My attitude shifted from pricing up what you could buy with your savings, to protecting it so it can grow further and buy you back some time.
Circumstances change. As you rattle through the pinball machine of life you will inevitably end up nowhere near where you thought you would. You move city, change careers, get married, have kids or invest in a business opportunity.
Having savings moves these from being a burden or a lost opportunity to a joy or an opportunity to pounce.
It’s a building block towards financial independence. This is, afterall, a blog about striving for Financial Independence. If you look hard enough between the swear words and poor jokes, it’s in there somewhere. Asking myself “Why Save?” now has an obvious answer, so I can build on that freedom feeling until I reach the point of Financial Independence.
If you save enough you can eventually live off the savings without ever needing to work again. It’s just a question of your level of expenses versus how big your savings pot is. One year of savings being equivalent to one year of expenses means you could live for a whole year without working. And so on. It reaches a point where the income and capital growth are greater than your annual expenses, meaning the fund can support you and continue to grow. That’s what I’m aiming for and it’s at the nucleus of why I save.
Dear spooky readers, can you think of other reasons why you should save?
Spend Less, Save More & Escape the Horde
Love, Mr Z
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