Why Savings Matter

In a recent post I made the assertion savings are important. I’d like to expand on that a bit. We all think we understand it, but I posit we don’t fully grasp it.

I am sure we all agree that having money in savings is good, despite that fact so few of us do it. What we don’t likely realize is why. Now, you may be thinking “yeah, so I can buy something better, or buy it w/o credit” - a valid thought. You may be thinking “in case I lose my job, I have something to fall back on.”, and again a valid and correct reaction.

But what you may not realize is how important a savings base is to raising wages. Consider losing your job. How many months of that income can you replace w/o credit? If you shrink your expenses, how many more months can you get? Prior to this downturn, I believe the average time to get a new job was 3 months. I believe over the last few years that average has gone up.

Last count I saw was the new average, increasing each month, was 7 months. Can you go for 7 months on no income? If so, I have some good and bad news for you. The bad news is you may have to - many states won’t “give” you unemployment because you have too much savings. The good news is if you are careful you’ll be able to hold out for the “right” job, or at least a commensurate salary instead of taking the first thing you get in a panic.

The longer you can hold out, the more likely you are to get it. I think we can all easily grasp that and find it makes sense. However, there is another aspect; one that is part of the failure to fully recover.

One of the problems with our current unemployment problem is the lack of geographic mobility. Moving to the jobs is a time-honored tradition. Those who can, will do so and continue to prosper. Those who can not will be unable to, and will likely dig into depression as the outlook gets worse.

If you have savings to be able to explore and even take a job elsewhere, you will bounce back or not even bounce at all. Of course, if you’ve been locked into place by buying more than you can afford it may not matter how much savings you have.

Sadly, if you aren’t driven to save you are probably going to buy more house than you need or can afford, thus getting trapped and lacking the mobility and finances it takes to stay afloat in tough times. If this sounds too familiar rest assured I’m not peeking into your life. I am reporting this from experience.

I just completed a tough move 1800 miles away, and if it weren’t for the foresight of my wife (who manages our finances) to make the tough choices to save when we cold have purchased, and our realization years ago that making two car payments at once sucks, we’d have been stuck in a place where my skill set was becoming less and less in demand.

Things aren’t swimmingly funded for us now, it is tight. But we’ve been here before and reaped the rewards of learning that lesson. We are making two house payments, but because we had savings and no car payments, that is (just barely) possible. We learned this in the last downturn and company downsizings.

I do wish those with an audience could realize this and educate people on the true value of savings. And I wish the government would stop pushing down the savings rate and relying on more debt to “save” the economy. Isn’t that what got us into this mess in the first place?