Oran Hall | Saving makes sense

Every person has two clear choices about what to do with money: save or consume. It is not that one should exclude the other totally, but that there should be such a balance that surrendering some current gratification should bring sustained future satisfaction.

There is value in saving.

It yields many benefits: financial security, wealth building, inflation protection, retirement preparedness, and financial independence, and there are many strategies that can be used to save effectively. These include having clear goals and targets, having a spending plan, paying yourself first, automating savings, shopping smartly, and saving safely.

Saving opens the door to short and long-term financial security. It is a financial safety net that provides funds for emergencies such as job loss and medical expenses. By reducing the need to borrow, it reduces stress and fosters overall well-being. Beyond emergencies, it fosters life-long financial security through the building up of resources to fund meaningful financial goals.

To save is to create the foundation for realising personal and financial aspirations. Some goals like home ownership and education often cost more than an individual can afford, but saving helps to reduce the need to borrow and to offer some equity as the basis for borrowing to realise such life-changing goals.

Economists make it clear that savings equal investments. Not saving seriously hamstrings the ability to invest and forces reliance on the expensive option of using other people’s money. It is the money saved that provides the means to create and grow wealth using the suite of investment instruments like stocks, bonds, precious minerals and business.

Some of these appreciate in value, but some generate additional income through periodic payments like interest, dividends, and rent.

To varying degrees, the investments that a structured programme of saving spawn help to create a cushion against inflation and economic downturns, which may cause respectively, reduced purchasing power and unemployment, or lower incomes. In effect, by saving, people are able to protect their standard of living.

As important as it is to save for the working years, it assumes great importance for the post-working years. Retirement is the time when, generally, pay stops and a pension becomes an important source of income.

While it is the savings of the employee and of the employer – in some cases – which provide the pension, it is the individual’s additional savings which help to provide the additional income the retiree needs to maintain the usual standard of living.

Saving empowers individuals to make independent financial decisions and to reduce reliance on costly credit options, but it requires discipline and the effective use of several strategies.

Setting clear goals is an important way to foster a culture of saving. Determining clearly defined goals with timelines and costs – which may have to be revised as prices change – makes it easier to set savings targets and to cultivate frugal habits.

A spending plan – also called a budget – is a critical element of any savings programme. Give savings pride of place in your plan. Warren Buffett is credited with the following advice: “Do not save what is left after spending, but spend what is left after saving”. Account for all income and expenses and keep track of them month-by-month. Take action to re-align spending with income if there is a deviation from the plan.

Pay yourself first. Move funds from the account to which your pay is deposited to a savings or investment account. Do so promptly, preferably using an automatic transfer mechanism. Keep the funds in an account that is not easily accessible.

Anticipate unplanned occurrences. Set up an emergency fund made up of liquid instruments that earn interest, and reduce the temptation to encroach on long-term savings and investments when the unforeseen presents itself.

Shop smartly by shopping around for the best deals. Use published prices, where available, to save time. Buy in bulk as much as possible and avoid buying sub-standard products for the sake of paying less. Quality is important. Negotiate where possible and capitalise on opportunities to get discounts.

Set up automatic bill payments to reduce the risk of paying late and incurring late charges; they add up over time. Paying on time helps to build a good credit history and the resulting credit score may yield the benefit of more favourable credit terms.

As for savings, save safely by selecting strong financial institutions and think carefully before placing funds just to get higher rates. Opt for term deposits over savings accounts for better rates, and select short-term instruments offered by the Bank of Jamaica and secured instruments offered by and through financial intermediaries.

Saving makes sense because it creates resources to fund important financial goals and foster sustainable financial independence.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com