Saving is a major part of getting ahead in life. Saving money for future expenses or purchases is a fundamental way to ensure you have what you need when you need it.
Saving money can also help you get ahead financially. The more money you save, the more income you can generate via investment returns. The more income you have, the more freedom you have to do what you want.
With advancement in technology and economic theory, there has been a shift in how people think about saving money. This shift has come about as a result of new ways to evaluate the effectiveness of saving.
The old adage “save early” is true, but only because it assumes that “early” means right now, at this moment. It does not take into account potential future time periods where one could save more than they do now.
This article will discuss the different ways that the notion of “early” has changed, as well as how these changes affect savings effectiveness.
Higher savings rates are a bad thing
A nation’s savings rate is the portion of a country’s income that is not spent on consumption.
In other words, the more money a country has, the less of that money it tends to spend. How strange!
Saving is a good thing, however. A high savings rate indicates that a country’s citizens and/or government are planning for the future, and this forethought may save costs in the future.
If the average citizen has enough savings to live off of for several months or years, then there is less likelihood of social unrest due to unemployment or economic downturns.
There are several ways to increase the national savings rate, and they all involve changing how people think about spending money. The first step is to recognize the problem.
Reasons countries save more
Countries save more when their citizens save more, when companies save more, and when the government saves more.
Citizens save more often when they earn higher wages and/or prices rise. As prices rise, citizens must spend a higher proportion of their income on necessities such as food and housing.
Companies save more often when profits decline and/or they feel uncertain about the future. Fearing lower profits in the future, companies stock up on supplies or invest in other assets to protect themselves.
The government saves more often when they feel the need to provide for a potential lack of revenue in the future. The government may also save more in order to provide for a potential increase in need for services such as healthcare or social services.
Reasons countries save less
Countries save less when they are experiencing higher income levels, and when the national economy is growing.
As the country’s workers earn more, they put more money into savings accounts and investments. As the economy grows, companies make more money, so they put more into savings and investments.
These two factors combine to increase the country’s national savings. When the country’s national savings decreases, it is because people are spending more and investing less.
Climate change is a significant threat to our planet and our way of life, but most of us don’t think about it every day – unless there’s a storm brewing outside. For some people, climate change isn’t a priority; for others, it doesn’t exist at all.
What happens to investment rates?
A country with a high savings rate will have higher investment rates, as more money will be available to invest. This can be in the form of infrastructure projects, research and development funding, or just plain investment in stocks and bonds.
As mentioned before, a country with a high savings rate will see an increase in productivity due to improved infrastructure, better technology, and more employment opportunities.
A country with a low savings rate will have lower investment rates as money will need to be diverted into consumer goods and services. This can lead to lower productivity and less jobs in the long run.
The difference between the two countries comes down to what level of consumption they desire. A country that desires lower levels of consumption will have less investment, but also less unemployment as people are spending less on consumer goods.
Does this mean more capital accumulation?
Yes, capital accumulation is the process by which a country increases its wealth through the accumulation of assets and investments.
A country that saves more of its GDP will have more capital to invest in assets, production facilities, and infrastructure due to the higher level of savings.
The problem with this theory is that it assumes there will be good investments for this capital. If there are no good investments, then this theory does not hold up.
If there are no investment opportunities then all of this new saving will not do much good. A country could save all of its GDP, but if it does not have any investment opportunities then it will not grow economically. This is why investing in development projects is important.