Are you telling me that saving is no good? Isn’t that someone has come up with the notion of ‘saving for a rainy day’?
It is not that I am against saving in principle; however, you have to be very careful if your saving does cost you money. It may sound strange when we say that saving can be bad for your financial health!
What I am trying to say is that we can’t just blindly think that ‘a penny saved is a penny earned,’ although this is words of wisdom from Benjamin Franklin.
To accept the notion that saving can be a bad thing, I would like to illustrate by using an example:
If you have USD1,000 in savings in an account somewhere and you are earning 4 percent interest, you will earn USD40 in interest over a year. If at the same time, you are owing credit card company for USD1,000 and that the interest charged on this outstanding is 20 percent, this would mean that you are paying USD200 in interest to the credit card company.
From the above example, it does not make much sense for us to use USD1,000 for savings, as this saving is costing you USD160, hence we might as well use the USD1,000 to pay off the credit card debt.
To make the most of your finances and of your savings, we will need to take a systemic view of our finances instead of viewing them as a collection of discrete activities. In short, we need to learn that:
- If your income exceeds your outgoings on a regular basis, then saving is a perfectly sensible financial strategy.
- You need to weigh whether your savings will cost you any money if you have debts elsewhere. The general principle is that you should use your savings, no matter how meagre, to pay off as much debt as you possibly can if the savings cost you money.
What I would like to stress is that—don’t save if it costs you money; however, if saving can make you happier and fewer worries, then you may want to keep a small sum tucked away for emergencies.