I was listening to my favorite economist this week, but I had to disagree with him. A favorite economist, you say. Well yes, I may not be able to fathom all of the complexities of the markets, but I have enjoyed the writings of Tim Harford and his commentary on NPR. He has a new book out that I will have to find. I think his work, The Undercover Economist, should be essential reading for the business community or anyone interested in this field.
To save or not to save; oh, that is the question! I have been an advocate for saving on my posts here, but Mr. Harford offers a different view. If you do not have the money, should you save money? No according to this intelligent advisor. He gave this example: saving money when your funds are tight is the setting money aside for your future self. Your future self will be wealthier than your current self anyway, because of improvements in your earnings, so you are setting money aside for when you are going to be wealthier anyway. He likened debt to borrowing money from your future self. This argument speaks to a core belief in many people: I cannot save because I have too many expenses now. Harford’s argument allows you to enjoy this money now.
Why would I disagree with this idea? I imagine in a more in depth format that Harford’s position may be more nuanced, and he may not dismiss my thoughts on the matter. Firstly, there is retirement planning. In the United States, we have been saving far less than needed for our retirement. In the past, with good pension plans, we were going to see a comfortable retirement without having to save on our own. My pension from another job will only offer me $360 per month (if it still is there). Secondly, in this time of uncertainty with your job (will you have one next month, or will you have the income that you need), an emergency fund can be a way to easily handle tough times. Maybe you will not lose your income, but a large expense can put you into financial stress, which frequently leads to a downward spiral in your personal life. I have mentioned having a $5000 savings for home expenses, and financial advisors have suggested having at least three months worth of salary to weather income loss. Studies show that many of us do not have these funds, so I think it is wise to advocate saving toward this goal.
When your money is tight, you need to find ways to cut back on expenses. We generally react to increase prices by cutting back in other areas. Rising food costs lead us to skip going out for a meal. Rising fuel costs cause us to cut down on day trips. We are still spending the same amount of money, but we have changed how we are spending it. I
think that it is in our interest to find ways to reduce our expenses , so we can have those extra funds when needed.