Savings


Savings is the money that is not spent on consuming necessities or discretionary luxuries. Capitalism as an economic system needs consumers to consume. So, as economies get more advanced and as safety nets grow, consumers tend to save less and consume more, often getting themselves into debt. The negative savings rate (or household debt) that was built up in the US, the UK and other advanced economies was a cause of the 2008 Financial Crisis.

Savings are necessary not only to meet contingencies, but to also plan for retirement. However, the money that is “saved” does not have to sit idle and can be made to grow. When savings are invested, there is always a safety versus growth trade off.

Savings in Personal Finance

In personal finance, money put aside after meeting expenses is called savings. This money may be deposited in a bank, used for contributing to a pension plan or invested into the financial markets.

The Impact of Inflation on Savings

Inflation is a big threat to your savings. Inflation simply means rising prices, which exerts pressure on the purchasing power of money. Inflation makes it more difficult to earn a high rate of return on your savings. For instance, if the inflation rate is 3%, the interest rate would have to be higher than 3% for the investor to earn from the investment. Moreover, the interest rate should make up for any taxes to be paid on the earnings. Thus, savings need to be properly planned, given the erosive effect of inflation on the value of money and the impact of taxation.

Making your Savings Grow

The two main “savings” related investments are:

  • Savings Account – These accounts are maintained by retail financial institutions and offer interest on the money deposited. While the interest rates on savings accounts are typically low, they are a safe form of investment.
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  • Savings Bonds – An equally safe place to keep your savings is in savings bonds, since they are backed by the credibility of the government. These bonds offer a higher rate of interest than banks offer on savings accounts. Savings bonds offer tax benefits. There are four basic types of savings bonds: Series EE Bonds (offer a fixed rate of interest), Electronic EE Bonds (can be purchased online and are sold at face value), Paper EE Bonds (are sold at half their face value) and Series I Bonds (offer an interest rate that is indexed to the inflation rate).
  • Apart from these, there are a plethora of investment options for your savings. These include equities (or stocks), bonds, futures and options, funds (such as stock, bond, index and money market funds), investment clubs and alternative investments (such as art, property, gems and jewelry).

     

     

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