Saving Your Money
by Ron Kurtus (revised 26 November 2011)
Although you can spend all the money you earn right away, it is worthwhile to save a portion of your income to use at a later date. This allows you to purchase items that are more expensive and also gives you a hedge in case of an emergency.
This is often better than buying things on credit. Some savings can go into investments that will gain you interest and increase your earnings. Most people put their savings in a bank for safekeeping.
Questions you may have include:
- Why should you save?
- What about buying on credit?
- What about savings interest rates?
This lesson will answer those questions.
Saving for later purchases
Many items you want to buy cost more than the money you have available after getting paid and taking care of essentials, such as food and shelter. If you want something that costs more than you have available, then it is a good idea to save a portion of your earnings until you get enough to buy what you want.
Another reason to save is to have money available in case of an emergency. For example, if your coat was stolen or damaged, you would have the money available to immediately buy a new one.
It is good to designate a certain portion of your earnings to go into savings immediately after you get paid. In this way, you will not spend all of your money. It is only human nature to spend most of what is available, such that there is very little left over.
Buying on credit
The alternative to saving for a later purchase is to buy the item on credit and then pay it off gradually while you enjoy your purchase. That is called "instant gratification." Unfortunately, you also need to pay interest on the credit card or other form of credit. That can be up to 20% a year. For a $500 purchase on credit, you would be required to pay about $100 in interest in a year.
A major problem is that many people take this route and then end up with more payments than they can afford. They also end up paying much more for their items, due to the heavy interest rates.
Putting money in a bank
Usually, people put their savings in a bank. This is much safer than hiding your money under the mattress, especially if you are saving a large amount of money. If you need money, you can easily withdraw some of your savings from the bank.
The bank uses your money to provide loans to other customers, charging an interest rate. In the 1930s, during the Great Depression, a large number of people defaulted on their loans and the banks went out of business. In order to protect the savings of people, the Federal Government insures your savings up to $100,000 in case the bank has some sort of problem.
Banks used to give around 5% interest on your savings, which is another benefit. On $1000 savings, you would get $50 a year in interest from the bank. Unfortunately, that interest rate has dropped in recent years that it now seems negligible.
Many people put their savings in stocks, bonds and other investments. This has the advantage of much greater interest rates and yearly dividend earnings. The downside is that investments can be risky, such that you could lose much of your money. Also, you can't withdraw your money whenever you want, as you can with a bank.
It is worthwhile to save a portion of you income so that you can purchase items that are more expensive at a later date. This is often better than buying things on credit. Some savings can go into investments that will gain you interest and increase your earnings, but most people put their savings in a bank for safekeeping.
Resources and references
Save for Everyday Life - Tips from Power Over Life
Questions and comments
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