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Having savings is a good thing, right? There are lots of reasons why you should save… but have you ever considered the disadvantages of saving money?
It sounds ridiculous, what could possibly be the downside to having a pot of money stashed away?
There are many reasons why having savings is a good thing:
- You don’t need to rely on debt or borrowing in an emergency (for example if your car needs unexpected repairs or a home appliance suddenly breaks and needs replacing).
- You are able to continue to pay your bills for a period of time if you were to suddenly lose your job and have money to tide you over until you find new employment.
- You can take advantage of opportunities that present themselves to you without worrying about the financial burden.
- You can become more financially independent – i.e. you don’t need to rely on anyone else for financial support.
- It gives you more flexibility to live life on your terms.
But in some circ*mstances, saving money isn’t always the most financially savvy decision to make.
So with that said, let’s consider when saving money isn’t the best option and the disadvantages of doing so.
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Table of Contents
The Disadvantages of Saving Money
Debt is Expensive
There are some varying opinions on whether you should save money when in debt but from a purely financial perspective – debt is expensive and so it makes more sense to pay off debt before saving.
The interest offered on savings accounts by banks is miniscule and when you consider the APR charged on debt, you’re actually losing money by saving instead of repaying interest accruing debt faster.
Of course, there are exceptions to this:
- your debt might be interest free for a period of time.
- you might want to have a small amount of savings that you can dip into in an emergency rather than increasing your debt.
- your only interest accruing debt is a mortgage (and weighing up the pros and cons of overpaying is another debate entirely!).
But as a rule – there is no advantage to saving money when you are being charged interest on any debt that you owe.
Fear of Missing Out (FOMO)
Saving money each month requires discipline, and unless you have an important goal in mind that you’re aiming for then saving can feel like a chore.
If you’re prioritising money in the bank over living in the now, you could feel like you’re missing out.
It can be hard to strike the right balance in life – somewhere between You Only Live Once and being financially prudent.
To get the most out of the act of saving:
- Set goals and create an achievable plan of action.
- Don’t restrict yourself by saving too much and not allocating money for enjoyment.
Your Money is Losing its Value
If you have lots of money saved and you’re holding it in your bank account, then you are probably at a disadvantage doing so.
Inflation in the UK has been rapidly increasing (9.4% in July 2022) and unless your bank account is offering interest rates of the same (spoiler – they aren’t) then any money you’re holding in these accounts is losing it’s value.
For longer term savings, you should consider your investing options which offer higher rates of return.
You’re Missing Opportunities to Increase Your Wealth
We’ve touched on this in the above points but
A.) Saving can feel pointless when there is no goal in mind.
B.) Saving in a bank account will actually lose you money in the long run.
Having short term savings in an Instant Access bank account is fine – you could take a holiday if you want, upgrade your home or treat yourself to some new things.
But if you’re in the habit of saving ‘for a rainy day’ i.e. you have no intention of touching those savings anytime soon but are more comfortable knowing they’re there – then you could be missing out on an opportunity to increase your wealth.
In the long run, that nest egg will be worth less and less if left sat in a bank account.
You don’t have to be an expert investor to get started with investing – there are investment platforms where you can open an account based on your risk appetite and which are managed for you (i.e they chose the stocks to invest your money in and charge a fee for doing so). {Obviously, investing does come with risk attached so please always do your own research and consult a qualified financial advisor if necessary.}
But do some research and consider if there might be better places for you to hold your savings that will increase your wealth instead of diminishing it over time.
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Am I really at a disadvantage if I save?
Of course, the act of saving money in general is positive.
What really matters is how and where you do it.
It’s not so much that you shouldn’t save money… but recognising that saving money might not always be the best financial decision for you at that point in time.
To summarise:
- Consider paying off debt before you start saving.
- Try to give short term savings a purpose to avoid the feeling of FOMO.
- Do your own research into investing and consider depositing long term savings somewhere that outweighs the effects of inflation.
At the end of the day, personal finance is personal. What works for one person might not work for another.
And as with everything in life, it is beneficial to weigh up the pros and cons of doing something to help you make the decision that is right for you.