When the question of why people save is asked, it is a given that responses won’t show much divergence just as would be the outcome of a question of how we save. 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).
The definition expectedly seem to support the traditional world view of what savings has been known to be: when income exceeds expenditure, then people can and will save. Whilst this reflects the dominant logic, a dissection of the true intention and purpose why people save thus speak to the need for a rethink of the traditional savings model as we have all practiced in our lifetime. A view is strongly held that necessary realignment of the why and the how of savings stand crucial to driving a bigger personal purpose.
Let’s start with the fundamental question of why people save. A common economic theory about resources and demand on them posits that, human wants are and will forever be insatiable and thus available resources which are limited shall forever be under pressure. A dream of owning that brand new Benze doesn’t end there when it is finally achieved, new wants keep showing up as we believe that will add some additional level of happiness to our life. So traditionally we have saved because we need to enjoy something that cannot be afforded immediately with our current disposable income, given the priority of necessities or needs, or we anticipate a visible future event that will require financial commitment, such as a ward’s tuition, that we may not be able to meet if we don’t commit to build-up savings over a period. The expectation for savings is that, we will be able to achieve a targeted amount in the near future to bestow on us the purchasing power we need. If this is indeed true and new needs/wants have powerful hold on our disposable income, then it is not at all a matter of when income exceeds expenditure. It is rather a matter of making the income exceed the expenditure, and creating reserves by eliminating or delaying less-critical expenditures.
The argument is that, the traditional model of creating personal reserves based on immediate visible need and when income exceeds expenditure is unhealthy and un-purposeful. This drives unnecessary short-term pressures to achieve savings target, and realistically in a world where human wants are insatiable, income will never exceed expenditure, and this can lead to stressed situations for the individual. If savings is always considered crucial in the face of pending need/want, all actions directed towards it achievement will be fraught with anxiety, excessive curtailing of current critical expenditure, and eventually an imbalance financial life which can impact all constituencies depending on the available disposable income. For instance, normal rounds of square meal may have to be reduced in the home, well needed vacations would have to be postponed with the added stress of parents/guardians having to come with creative explanation to convince children/wards, all in a programme of building-up reserve to meet time-bound need/want which has suddenly showed-up or highly anticipated.
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 with little anxiety 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.
What the proposed enhanced personal savings model is
A deliberate and consistent culture of building-up reserves incrementally, even if that means self-imposed reasonable pressure on current disposable income by way of cutting non-critical spends, together with critical 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.
Why the enhanced model would require commitment and discipline
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 to achieve the purpose of savings. In effect, Personal savings solutions available on the market lack these key elements to drive meaning and purpose.
Why micro-saving solutions works best with 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 so that the impact is almost non-existing. 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.
A mix of the two models presents the ideal way forward
In this light, it seem plausible that a mix of the traditional model and the proposed enhanced personal savings model will better address both short and long-term expenditure pressures and thus establish a sound financial state for the Ghanaian.
The traditional savings model, as has been deduced, works best to respond to immediate short-term expenditure calls. Thus, it serves more as an on-demand savings product that requires no permission to fall on. Largely, this is what is available on the market and what almost every bank-account-owned Ghanaian can access. Whilst this is important for short term needs/want to be met, it lacks the disciplinary feature that is required to prepare for longer-term uncertainties which holds the potential to throw significant shock at disposable income.
The shortcoming here would be better catered for with a discipline-embedded micro-savings product with medium to long-term horizon as proposed in the enhanced incremental savings model. The overarching rationale is to create future liquidity, in a gradual and consistent manner that looks at securing long-term expenditure demands and the readiness when it arises. The commitment and disciplinary feature is represented by fixed monthly commitment amount and longer minimum savings tenor after which a significant and meaningful built-up savings becomes available to be accessed when a cash need arises.
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.
Author: The Chief executive
Strategic Bridge is a retail-focused micro-savings specialist business committed to offering personal savings solutions that enables the actively working citizenry build-up savings purposefully and un-painfully.
Contact: 0506 132 239
0277 324 258
URL : www.sbghana.com
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