Too many people fail to save enough money. While savings rates in the United States increased during and immediately after the financial crisis, they have since fallen back towards historically low levels. Economic growth depends on savings. Savings allows for the growth of capital, enabling greater production and a higher standard of living. Without savings, the only way people can consume is by consuming capital, which will lead to a lower standard of living in the future. That’s why news that savings rates have plummeted is a discouraging sign and indicative of an impending recession.
Many People Stop Saving During the Boom
The temptation for many households is to stop saving as much money when times are relatively good. When the job is paying well, when the economy is strong, people are tempted to start spending. They might buy a new car, or a new boat, or start going out to eat more often. They think that the good times are here to stay and will go on forever. They stop saving as much money because they figure the growth rates on their investments will continue to increase. They may even go into debt to make some big-ticket purchases, figuring they can always pay it back later.
When the recession hits they are completely unprepared. Some may lose their jobs, others may have to take pay cuts. Returns on investments drop as the economy turns sour, and all of a sudden any savings or investments they may have stopped performing as well as before. The business cycle can be ruinous, but it is a feature of modern markets that won’t be leaving us anytime soon.
Because of central bank creation of new money and credit, interest rates are artificially lowered. That’s what we see when central banks announce that they’re lowering their target interest rates. They create new money and credit and purchase assets from banks to push new money into the financial system to lower interest rates. Those lower interest rates spur more investment in long-term projects.
Long-term, capital-intensive projects that might not be profitable at a 5% interest rate all of a sudden look really good at a 3% interest rate. That’s where we start to see more skyscraper projects being built, large numbers of airliners ordered, bigger and bigger cargo ships being built, and a boom in both residential and commercial real estate.
Everyone thinks the economy is doing great because things are being built, people are being put to work, etc. But when the time comes to sell office space in those skyscrapers, to sell tickets on those airliners, to ship cargo with those container ships, or to sell those houses or rent the office buildings, there just isn’t as much demand. That’s because the low-interest rates were caused by central bank money creation and not from savings.
If people had saved money in the past to consume more in the future, interest rates would also have dropped due to the increase in funds available to lend. But as those projects were completed, people would have then drawn on their savings to purchase newly-available goods. Instead, because those projects were funded by central bank money creation and not from savings, consumers didn’t have enough money saved to be able to purchase those newly-available goods once they became available. The long-term projects found an insufficient number of buyers. They were unsustainable, but that was only realized after the fact. That is what results in economic bubbles bursting.
Unsold houses have to be marked down to find buyers, skyscrapers remain empty, ships remain anchored in harbor. Investors and savers who understand the business cycle, who keep a close eye on the actions of central banks, and who are able to identify the existence of bubbles and when they’re about to burst will make out better than those who don’t. More importantly, they understand the importance of saving money during both the boom times as well as the bust to ensure that they remain financially protected.
Saving for Retirement
There’s no way around it, you have to save money if you want to retire. Social Security won’t cover the cost of living when you retire, and the Social Security trust fund will run out of money by 2034 or even earlier. If you’re fortunate enough to have an employer-provided pension, you’d better hope that your employer is fully funding it. Many pension plans today are significantly under-funded, making it very likely that you won’t receive full pension benefits when you retire. That makes it all the more important to have multiple savings plans for retirement.
Financial diversification is a great thing, as it keeps you from putting all your eggs in one basket. You can’t put all your trust in Social Security, just like you can’t put all your trust in a single pension plan. If you’re investing in a 401(k), you shouldn’t put all your money into a single fund. If you’re investing in multiple funds they shouldn’t all be with the same financial firm. And you don’t want all of your assets to be tied up in stock and bond markets either. A good mix of assets that includes precious metals and other non-financial assets will help diversify your portfolio.
Diversification doesn’t just mean investing in a wide variety of stocks and bonds, it means diversifying as much as possible to minimize risk so that you’re not completely exposed to a single type or group of assets or to a single company that might go bankrupt. That way if an investment firm goes under or a single class of financial assets loses value you won’t lose the entirety of your retirement savings.
Preparing for Unanticipated Expenses
Saving is also important for facing unexpected expenses. If you get a flat tire, or your car’s radiator stops working, or the fuel pump goes bad due to too much ethanol in your gas, you’re looking at hundreds of dollars of repairs. If you take a bad fall and break a bone, you’ll face some unexpected medical expenses. Even with a good healthcare plan you’re still likely looking at hundreds or even thousands of dollars of expenses if you haven’t reached your deductible or your maximum out of pocket limit.
But it isn’t just emergencies that you need to be prepared for. What if you’re looking for a nice plot of land to start a hobby farm or build a retirement house in the future? What if the perfect plot of land comes up for sale right now? Do you have enough money to comfortably make a down payment? The same goes for cars, generators, propane tanks, or whatever might conceivably be on your wish list. If you have enough money saved up, you can jump at those chances. Having savings on hand opens up a world of opportunities.
Saving money contributes to overall financial security. If you fail to save money, you’re dependent on your paycheck to pay your expenses. Living paycheck to paycheck is dangerous, as getting laid off or your company going bankrupt destroys your ability to live well. Having money saved up allows you to be financially independent and allows you to weather layoffs, recessions, and any other unforeseen events. It gives you a much-needed cushion through both good times and bad times. A well-diversified portfolio of savings, including precious metals investments such as a gold IRA, can help you achieve financial stability and live comfortably.