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Why saving money is good for you

Why saving money is good for you

By what is probably a combination of both nature and nurture, I am a thrifty person. I believe that in many areas of life, the motto “less is more” rings true. An accumulation of material goods – constant upgrading of new phones, laptops, cars, clothing – is superfluous and not required for a happy life. Having said that, there is perhaps one area of life where having more may in fact be, well… more. Personal savings.

To be clear, I am not suggesting that everyone should go out and request a wage increase, work overtime, or marry a banker. Because in fact, it is not income which is in question, but rather what you have left over after money is spent to support your lifestyle, whatever that lifestyle may be. It is not necessarily the case that those with higher incomes have greater savings.

Illustration by Karoshikula
There are several arguments supporting an accumulation of savings, beyond the potential (often very low) interest to be earned on it. These include accessing opportunity for upward social mobility, psychological wellbeing, better decision-making, and improved civic engagement.

Having a pot of savings provides opportunities. As a colleague Marcus wrote last week, the onus of professional skills development is increasingly put on the individual, not the employer. Undertaking activities such as training courses, professional charter membership, or un- or low-paid internships, may help people to move into a better-paying or more personally satisfying job in the long run. Similarly, entrepreneurship often requires cash; even if a bank loan is secured for the initial investment of capital, a small pot of savings might serve as a wage while getting a young business off the ground. Having savings may be one tool of a larger set useful for upskilling, career change and, ultimately, upward socio-economic mobility.

The consequences of having savings extend beyond just financial benefits to provide a psychological benefit, too. They provide a buffer in case of a financial emergency – a broken boiler in the depths of winter, or an unforeseen trip abroad to care for a loved one. Knowing that emergencies can be covered without failing to meet other commitments or sacrificing other purchases can reduce stress and provide a sense of security, contributing to an improved sense of overall wellbeing.

Savings may also help us to improve our decision-making. Those who read my previous post will be familiar with the suitcase analogy – where decision-making under scarcity is likened to packing a suitcase. The more stuff to pack, or the smaller the suitcase, the more complex the problem becomes. The complexity depletes an already limited stock of cognitive resources required to make decisions which are in our best interest.

To extend this analogy, having savings is like having a spare fold-up bag. You don’t necessarily use it, but you know that you have it in case on your journey you acquire “extra stuff” to pack. In this sense, having savings to draw on in emergencies eases the cognitive strain associated with juggling commitments on a tight budget, and with less strain comes better, more effective decision-making. Having savings may help perpetuate an upward spiral of good financial decisions.

Illustration by Karoshikula

Finally, it can be argued that having a stock of savings may help improve civic engagement. The benefits discussed above require that savings are liquid, but there may be value in having savings even if they are not easily transferable. Michael Sherraden has been a long-time proponent of asset-based welfare. The link here is that savings facilitate investment into assets; for example they can be used as a down payment on a home. Although the merits of home ownership have been both extolled and disputed in the past, theory has it that home owners or local business owners may feel that they have a greater investment and sense of belonging in the community, and are thus more actively engaged citizens.

Saving money is good for you. However much or little you may earn, if you are able to set aside even a small amount each month, this gradual accumulation of savings will pay you dividends in more ways than one.

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