1 Why should we save up for the future?
In Charles Dickens’s book David Copperfield, Mr Micawber mused that an annual income of £20, coupled with an expenditure of £19, 19 shillings and sixpence (leaving sixpence over to save) was happiness itself. Whereas the result of spending £20 and sixpence (and having to borrow the difference) would be misery. Linking happiness or misery to having surplus income or surplus expenditure may be somewhat simplistic, but for many people having spare income, and thus an ability to put money away for the future, can indeed help make life easier and more rewarding.
When thinking about the reasons for people to put money aside, we’re really thinking about why they are deferring consumption rather than consuming now.
This can be for a number of specific or non-specific purposes.
Future purchases – both known and unknown
If you know what you want in future, you can put a certain amount aside each month (or week), based on a calculation of how much you need for a particular goal – such as buying your first home, a car or even to save for Christmas. It could simply be to have money put aside for items or services you don’t yet know you need or want.
A safety net
Another reason is the ‘precautionary motive’ – perhaps more commonly known as ‘saving for a rainy day’. This involves building up a buffer of funds to provide for unexpected events and bills, which can provide you with emotional and practical security because you know you have funds to call upon if you really needed them.
Supporting a change in lifestyle
Having sufficient savings could enable you to leave a job, to take a break for a few months. It could also enable you to do or buy things that you want, or to take advantage of opportunities that arise (such as being able to pay for education or start a business).
Planning for later life
One of the most significant purposes for saving is to help provide money for retirement. Another reason could be to have money set aside to pass to your dependents when you die.
As we are all different, you may have other motives not mentioned here.
The reasons above all underline an important overall aim of having savings – to ensure you do not overdo it now and leave yourself short for important future expenditure, and to create financial security and independence.
Activity 1 Your reasons for saving up for the future
What plans do you have for the money you have currently saved or invested? Over what time period do you expect to use this money?
If you currently have no savings, consider the objectives you would have if you started to amass them.
Answer
While your response will reflect your personal circumstances, savings usually have multiple purposes – from a safety net to deal with immediate financial emergencies, to a pot of funds for future treats or necessities such as a new car or a world cruise, to a store of wealth for your family to benefit from in the future. The short-term use versus long-term use of savings needs to be reflected in where you save or invest your money – some ideally needs to be easily accessible while some can be put aside for many years.