Why Saving is Critical in Today's Economy

As the current recession has shown, the economy can go from booming to terrible in a very short time. There is no quick, easy solution for the credit crunch or the housing depression, but there is definitely a lesson to be learned in all of this: saving is critical in today's world.

The Job Market

In order to really understand why saving has become so important, you should consider what the job market was like a hundred years ago. There were a lot of manufacturing and industrial jobs, and at the end of your years of loyal service to a company, they provided you with a pension in retirement. You also could conceivably stay with a company from a young age until retirement; nowadays, people often change jobs every few years. Aside from depending on unemployment insurance and/or severance pay, there is little recourse for people who lose a job if they don't have savings to tide them over until their next job.

Saving for Retirement

Social Security was introduced in the 1930's as part of Franklin Delano Roosevelt's "New Deal." It was meant as supplemental income for people who were retired, in addition to that pension I just mentioned. The reason there are 401(k)s where they match your contribution, tax-free and tax-sheltered IRAs, and less taxation on capital gains (as compared to ordinary income), is because the government has shifted the burden of saving for retirement to the individual. You cannot depend on the government or your employer for a comfortable retirement anymore. Without enough savings, you will have to depend on Social Security, and it's questionable how much longer that program will remain solvent. Current workers are paying into the program to support multiple retirees each; instead of having a healthy surplus, the government is in danger of using up all its savings.

Saving Helps You Stay Ahead

As I mention in my article on credit cards, it is easy to fall into the trap of just making the minimum payment on your bills. However, this means that you're constantly trying to catch up, which works against you. Most of the money that companies make from people is interest, not the product they've sold. They prey on people who are behind on payments. To counteract this, try a new saving strategy: if you see something you'd really like, pay yourself monthly for the product. For example, you see a nice $1000 television. Instead of charging it or taking out a loan for it, just pay yourself the same monthly payments as if you had charged it. After a few years, you have enough money to go out and just buy the television without any of your money wasted on interest. And if you decide to charge the item or take advantage of a "no interest, no payments until x year" deal, you can keep earning interest on your savings in a safe account and pay the bill off in full later. This essentially turns the tables on the company you buy from; now you are the one who's borrowing their money at no extra charge and earning interest on it.

Live Below Your Means

It's a tough thing to hear, but in order to save, you must force yourself to live below your means. There are great opportunities nowadays to increase your means (Associated Content is a good example), but even if you don't make a lot, you can grow wealthy by being smart with your money. Saving as much as you can is critical, as is finding smart ways to grow the money. Treat your savings and retirement accounts as bills that must be paid too. With perseverance, this method will give you the kind of progress you want. Good luck and get saving!