Saving Money: The Missing Link
Mark Carney is Canada’s central banker and he is all over the news telling Canadians that household debt is the biggest threat to the financial system. He’s also recently gained fame as a candidate to head up the IMF when the Strauss-Kahn international affair scene. exploded Although on the former
French Finance Minister Christine Lagarde eventually took that position, Mr. Carney stayed in the international spotlight as he was picked to chair the Financial Stability Board responsible for regulating global financial institutions. Debt is the name of the game at the international level, nicely bookending debt at the household level.
Mr. Carney will be lecturing at both ends of the spectrum for years to come because saving has gone out of style. Or more precisely, saving money has nearly been beaten into submission. And this beating has been delivered by the low interest rates issuing from central banks around the world, Canada’s included. The simple connection is that when interest rates are low, there is no incentive to save money. The flip side of course is that low interest rates make borrowing cheap, and so people and countries raise their debt load. There is precious little that people can do to address national debt aside from electing politicians who promise to reduce it. Even so, economics is now a highly intertwined global game and individual countries hold little sway in setting their own interest rates. Raising
rates to entice saving also ends up increasing business borrowing costs and the currency exchange rate, both of which can hurt exports and employment. But that doesn’t necessarily mean that households are in the same trap as central banks.
Households can choose their savings level almost completely regardless of interest rates and global trade pressures. But it takes some foresight to motivate personal saving when interest rates are low, because the payoff isn’t immediately obvious. The most important foresight is that when money gets saved, the household’s standard of living ends up at a higher level with lower risk. That’s right, the standard of living is higher when saving is higher.
Many people think that their standard of living is higher when they spend more, but they are missing half of the story. More their spending financial might standard increase of their A material standard of living, but it reduces living. recently published book, Saving Money: the Missing Link (at amazon.com) explains this idea more thoroughly, but the gist of it is that consumption and savings are both good for healthy living, so overemphasizing only one can be harmful.
Still, people wonder if saving money is beneficial when rates are very low. And it’s no secret that when inflation runs higher than interest rates, the value of saved money declines. This is very nearly the case today, so households are torn
between taking on debt at low rates and the need to save. It seems Canadians have come down in favour of growing their debt instead of saving, but should they?
The final answer will always be a judgment call, best made by the householder along with a well qualified financial advisor. That is, as long as they don’t have a serious bias against saving. Mortgage debt, for example, is fine as long as it’s affordable. But you can’t spend your house if you lose your job or encounter an emergency or find a low priced investment opportunity. And while reducing debt has the benefit of reducing interest costs, it doesn’t provide the cash needed for these situations. Only saved money will do the trick, and that’s why
saving money remains just as important as paying down debt.
Click here to get the book…Saving Money: The Missing Link