SAVING HABIT LEADS TO A WELL PLANNED LIFE

The value of trying to save money cannot be underrated. Saving money is a great financial habit and should be adopted as early in life as possible.

Saving money is essential because it shields you and your family members in the time of need or any exigency. In addition, saving money can aid you to pay for large purchases, avoid liability, decrease your financial stress, and equip you with a greater sense of financial freedom.

Indeed, there are endless reasons to save money.

Some of the reasons that can help you cultivate this habit are

  • Freedom To Pursue Your Dream Career
  • Long-Term Security
  • Stress Reduction
  • Helping Others
  • Home Ownership
  • Major Life Events
  • Minimizing Financial Risk
  • Financial Independence

As we know that there are always two sides of a coin, savings have been criticized by economists. The paradox of thrift states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving.

In this form it represents a prisoner's dilemma as saving may benefit an individual but injurious to the general public. This is a "paradox" because it runs contrary to intuition. Some people who are unaware of the paradox of thrift would fall into a fallacy of composition and assume that what seems to be good for an individual will benefit the entire population.

The paradox of thrift in The General Theory, 1936:(1)

For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.

The theory is referred to as the "paradox of thrift" in Samuelson's influential Economics of 1948, which popularized the term.

Within mainstream economics, non-Keynesian economists, particularly neoclassical economists, criticize this theory on many grounds. And like other economic theories this one also suffers from the assumptions of the theory not holding true in the real world.

Keeping in mind the criticisms of the above theory and thinking from an Individualistic point of view, I conclude that Saving requires a sacrifice of present consumption and it will certainly pay off in the uncertain future.

References

1) John Maynard Keynes, The General Theory of Employment, Interest and Money, Chapter 7, p. 84