How can saving money affect economic growth? It depends on what you mean by the question; there is personal economic growth and the kind of growth that happens under a national economy. This question isn’t twofold; they are really two entirely separate issues.
How Saving Money Can Affect A National Economy
There are scholarly studies about the effects of saving money on the national economy; one cannot underestimate the power of the ebb and flow of money into the various systems and businesses that support the country with tax revenue, employment, healthcare insurance, and other crucial areas.
One way to examine long-term economic growth is to investigate a country’s capital accumulation. There is a scientific tool sometimes used in these investigations called the Solow-Growth Model, which holds that when a nation begins to accumulate capital, economic growth is considered strong.
But as the accumulation wears on, economic growth slows, according to the model. A study from 1995 reviewed 16 countries across multiple time frames and concluded that there is a relationship between economic growth and savings.
Published reports indicate that this growth is not tied to a specific technological advantage in one high-income country over another, though medium and low-income countries seem more susceptible to the variances of tech factors.
The study describes that relationship as “positive” but adds that negative effects can also be created in cases where enough people anticipate future income and spend more, saving less. Increasing “present consumption” seems to hinder future growth depending on circumstances.
Naturally, there are many other scientific studies and models, your experience or data may vary depending on the model selected.
How Saving Affects Your Personal Bottom Line
Nationwide results are great, but what about your own personal financial growth? Can saving money improve your economic growth? Yes. But HOW?
Let’s take something simple like a car insurance deductible. For many cash-strapped people, higher deductibles are desirable because it frees up money you can use for other bills. Higher deductibles = lower monthly car insurance.
But what happens if you get into a car accident with those higher deductibles? If you have money saved, your problems aren’t as bad as if you have to come up with the money for that deductible. A $1000 car insurance deductible isn’t a bad thing…as long as you have saved that $1000 for when it’s needed.
If you don’t, making the deductibles higher actually costs you more in the long run, assuming you do have to make an insurance claim. And it’s never safe to assume you won’t have to.
Saving money affects your economic growth in other ways; consider the interest paid on a Certificate of Deposit that you keep turning over into a new CD every time the old one is due. If you start a new CD at fixed intervals during the year and keep turning that money over, eventually you will be able to cash out at a profit.
But the key is to have a goal for that money that frees up your other cash for other purposes. To save is fine, but to save with purpose is even better. Goal setting, and using money-saving challenges can help make the entire exercise more fun and motivating.
Save Money And Grow
Two of the biggest causes of economic instability in terms of personal finances? Medical bills and student loans. Neither one can be fully avoided, and those who anticipate future problems the way car insurance buyers must are in a much better position to prosper and grow.
The key for some seems to be early prevention of debt accumulation; those who can find alternatives to student loans, for example, may work harder during their college careers, but they will have more money in the bank at a later date with fewer loans to contend with.
Some take out health insurance and/or student loans with a plan and a goal in mind; for example, those who need specialized healthcare will be far pickier about their deductibles and out-of-network costs than those who feel they are in good health and have no need of regular doctor visits or other ongoing care.
Save Today For Problems Tomorrow
Saving money forces the consumer to delay gratification. But the money you save with your frugal ways today can help you in an emergency tomorrow. And that is the real key to personal economic growth; addressing the serious issue of the big, one-time expense that potentially wipes out a consumer financially.
A car crash, hospital visit, family emergency, or even a sick pet. All devastating to those with little set aside; for those who save with just such contingencies in mind, future economic growth is set back, but not impossibly so, by such life crises.
The key is to start saving TODAY, no matter how small. Some people begin with a penny jar and increase their contributions daily or weekly until different options are required.
However you get started, the main thing is to consistently add to your savings in ways that soon become habitual. It’s only when you can “fire and forget” a payment into your savings account routinely that the money will truly start to grow.
You can also partner up with a spouse, best friend, family member, or co-worker to save money or to work out money saving challenges to keep you all thinking of your financial futures.
When you begin, don’t let the small amounts you are saving discourage you; the earliest days of your new plan should be easy to accomplish. Put yourself gradually into more significant contributions and see how much you can afford to set aside each time.
Joe Wallace specializes in personal finance, military affairs, and consumer protection topics. Since 1995, his work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and collects unusual vinyl records, which gives him an excuse to write the vinyl blog Turntabling.net.