About Personal Savings

This is an abridged version of an original article published in the Business & Financial Times (Issue 2482) on October 16, 2017 (page 18) by Strategic Bridge.

Savings has been defined as a fund put by as a reserve. According to Keynesian economics, “savings consists of the amount left over when the cost of a person’s consumer expenditure is subtracted from the amount of disposable income he earns in a given period of time” (credit: investopedia).

Whilst majority, if not all, save because an impending need exists, the rationale should be much more purpose-driven. Arguably, the real reason why we should save is because we feel insecure when sudden need/want in life exposes our financially vulnerabilities because available disposable income is unable to absorb the associated expenditure. Thus when we realize that, our disposable income or held-cash is inadequate to afford immediate critical spending be it an investment opportunity or personal/family need/want. In effect, the immediate financial pressure presents a distressed situation than would have been the case should we have decided to delay some gratifications and enroll in a self-imposed savings programme. Fundamentally, this is what we should all seek to avoid if we indeed seek to architect a financially better tomorrow.

A better savings model can generate a better financial future where we stand prepared to meet spending need, be it emerged, reasonably anticipated, or immediately critical simply because we have created a permanent space to incrementally build-up reserves. And it has been less painfully, consistent, and undisruptive to all interested constituencies. But, discipline and commitment would be the two most critical success factors under this model because without faced pressure, we have the likely tendency to capitulate when it comes to staying committed and disciplined.

A better personal savings model

A deliberate and consistent culture of building-up reserves incrementally, even if that means self-imposed reasonable pressure by cutting current non-critical spends, together with good dose of discipline and commitment, so that future expected and/or unexpected expenditure calls are well provided for in advance, is a purpose-driven savings model. Deliberately creating a less pressured situation, than would have been the case in the face of pending need/want, by creating reserves without or in the midst of present need/want in a sustained programmed, throws little pressure on disposable income during the period of built given that expenditure restriction would be gradual.

It is an act of saving as if the next need/want is lurking around the corner even in times when there is no real or anticipated need/want. It also works with the thinking that, we still create a savings space, with a long-term view, even as we currently strive to meet a need or an impending need in any current savings programme. Yes, still save as if the next need/want for cash has no patience for the current one to be dealt with. This way, surprised expenditure calls throws little shock at disposable income because built-up savings can comfortably absorb the cash call.

Commitment and Discipline is required

Achieving a purpose undoubtedly requires discipline and commitment. It is the only checks that prevent us from abandoning the journey when the going gets incredibly tough. And we have alluded to the fact that life pressures, made worse by consumerism, will always throw new needs and wants at us that we are wired to respond to.

Currently, available savings product drives difficult commitment and disciplinary behaviours and this eventually defeats the core purpose of saving. We can almost always go to our savings institutions and demand withdrawal against our savings anytime we want to. The only restriction is probably a minimum balance which must be maintained. Whilst customers value the flexibility in accessing their savings, the anytime-access mode takes away the critical disciplinary feature that we all require to be able to prepare for more pressured financial futures ahead. The tendency to fall on our savings account anytime a non-critical need arises is high, thus putting us in a position of financial weakness when much more critical financial situation arises in the future.  Truth is we are wired to want to meet immediate need/want when we have the resources with little regard for more pressured probable need/want event in the future. So without needed commitment and discipline in savings solutions, a future where we are better placed and prepared to respond to cash need will be absent.

On the other hand, if building-up savings takes the mode of customers having to initiate the deposit process always, the tendency to lax would mean loss commitment. Whilst this is the case with most savings product, it has not helped to drive the needed commitment and discipline to achieve the purpose of savings. In effect, personal savings solutions available on the market lack these key elements to drive meaning and purpose.

Micro savings solutions and the enhanced model

The idea of incremental build-up of savings works well with taking a long-term view to drive a very important objective: little impact on current disposable income to drive little disruption to current important expenditures. Taking a long-term stance is vital because the model supports the reality that tomorrow will present much more pressured financial conditions and so is the day after tomorrow. So having a long-term horizon, being prepared to go the distance in a savings programme, is a better approach to preparing purposefully towards more uncertain financial future.

In line with the idea of long-term view with short-term minimal impact on disposable income, the savings build-up method that stands reasonable is adopting a micro savings model. This works to propose little monthly commitment that throws negligible shock on current disposable income. This means that what is committed does not disrupt current expenditure plan in any significant dimension but over a reasonable enough period, the built-up savings is significant. The locked-in long-term feature makes this absolutely reasonable.

The proposed enhanced model works for people from all income class, from the CEO to the market helper, with the only difference being apparent in the monthly commitment amount. Obviously, size of current disposable income will be the common denominator that determines the monthly commitment that will drive little disruption to current expenditure plan, the very basis of the model.

Indeed, if savings is to be truly meaningful, it has to be purpose-driven with the necessary ingredients of commitment and discipline.