by Brad Homer
Believe it or not, there are some times and situations where saving money is a bad idea. Saving money is vitally important to any good personal finance plan, but why you save and how you save make all the difference.
First, let’s look at an obvious (though flimsy) con of saving money. Money saved is money you don’t spend right now. So, a con of saving money is that you don’t get to spend the money you’re saving until some distant time in the future. This is mostly a con to the spendthrift in you. A much bigger offsetting benefit is that your saved money acts as a buffer to cover unexpected future expense, or will allow you to purchase something you’re wanting without going into debt.
More substantial cons arrive when some specific scenarios are considered. For example, if you already have a fair amount of savings to cover unexpected future expenses, saving more money in a savings account with a low interest rate is not such a good idea during periods of high inflation; if your saving s account yields 1% and inflation is at 4%, you’re losing money. Saving money for the long term (beyond short term, unexpected expense needs) is better done through investments with a higher return than your average savings account. Another example would be if you or a family member is facing a lifetime event, and money is needed now, not later. The cons of saving money versus spending it stack up sometimes when life throws us challenges. One more not so obvious scenario: you get an unexpected windfall of an extra $2,000 and you are torn between saving it or using it to pay off $2,000 worth of debt. What should you do? If your credit card balance has a 12% interest rate and your savings account has at most 3%...pay down your debt and keep more money in your pocket in the long term because of the interest payments you’ll avoid. A similar scenario to consider: long term savings for your retirement are essential if you plan to retire one day, but paying off a high interest loan before focusing on your retirement may make more sense for you if you’re still young.
Saving money for the sake of saving money is a waste. Saving money to improve your life or to invest in productive pursuits that increase the capacity for generating real value in the future are the best reasons for saving money. Everyone’s situation is unique and you have to decide what makes the most sense for you financially. Saving money is nearly always a good idea up to a point and essential if you’re planning to retire. But, as suggested in this article, you have to choose when and how you save carefully, based on the circumstances in your life.
Millionaire 2020™ can help you plan your savings and get you on the road to good budgeting.