When Saving Is Bad For You

Written by imoney

Saving can be bad for you.

We bet that’s a sentence you never thought you’d read in iMoney Philippines of all places. But saving, that holy grail of good money habits, isn’t always a smart thing to do.

Depending on your financial situation, putting away 20% of your paycheck in a savings account every month might even be the worst move you can make. Confused? Read on to find out when saving is bad for you:

When you already have high-interest debt.

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When you have debts running like one from your credit card, it makes no sense to save instead of paying off this debt. This may seem obvious, but if you have to prioritize building your emergency fund instead of making yourself free from debts, then you’re putting your money in the wrong place. And this mistake could cost you big. Did you know that you could be paying over 50% in interest every year on your credit card debts if you only paid the minimum?

Let’s do the math. Say you have P50,000 in credit card debt at 3% interest a month, and you have P10,000 available every month for either saving or paying off debt. But you only paid P2,500 a month because you’re busy putting the rest of your money in savings.

Not only would it take you 30 months to completely pay off your card this way, it would also cost you almost P24,000 in interest payments alone, or almost 48% interest over the life of your debt.

Meanwhile, in the same theoretical amount of time, you’ve been putting P7,500 towards your emergency fund in a savings account that earns 0.25% per year. After 30 months, you will have earned a whopping P790 in interest. So by prioritizing saving ahead of debt payment, you’re essentially wasting just over P23,000 of your hard-earned money in this scenario.

But what if instead of saving, you prioritized debt payment? Of your P10,000, use it all to pay debt instead of saving. This way, you’ll take only 6 months to pay off all your credit card debt, and you’ll only pay around P3,300 in interest. After your debt is cleared, you’re free to use your P10,000 that you previously allocated for debts to save if you want — but as you’ll see in the next part, this may still not be the best thing to do with your money.

When you want to earn more returns.

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If paying off debts isn’t a problem for you (and we should all be so lucky), then you should be looking to build more wealth with your earnings. And as we’ve told you before in our article Just Saving Won’t Make You Rich … well, the title’s pretty self-explanatory. Putting your money in a low-interest savings account will actually lose you money in the long run, as the rate of inflation greatly outpaces the teeny tiny interest you earn in a savings account.

So what should you do if you want to increase your wealth? As Randell Tiongson says in our Achieving Financial Freedom article, the secret to financial freedom is “spend less than you earn, and invest the difference”. When you want to earn more returns, just saving is a bad idea — you should invest your money instead.

But you might still be intimidated by the world of investing, because of its risks. The good news is, you don’t have to be a super expert to make money this way. There are investments like UITFs and mutual funds that are beginner-friendly and easy to stick to. If you’re feeling up for more rewards at more risk, then venture into the stock market. You can also read our articles on how to invest to help you prepare, and you can buy books and do independent research to find the investment tools for you.

You can also give peso-cost averaging a try. With this method, you invest roughly the same amount of money in a carefully chosen stock every month over a long period of time. Want to learn more? Read our guide to peso-cost averaging.

To find out the type of investment that suits you, talk to a financial advisor, or do some more research until you identify the kind of investments you’d be most comfortable with. Alternatively, if you sign up for trust funds with banks, they will give you a questionnaire to assess your risk tolerance, and recommend funds accordingly.

But saving can still be good for you!

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Putting your money in a savings account still has its uses:

• Insuring your deposit. All depositors are insured up to a maximum of P500,000 per bank by the Philippine Deposit Insurance Corporation (PDIC). Investments aren’t. So if you’re worried about losing money, put some in a savings account to assuage your fears.
• Easily accessible funds for emergencies. When you suddenly need to fork out P20,000 on car repairs, it’s not going to be easy to get that money immediately if your money’s all in investments. Savings accounts give you fast and ready access to your cash when you need it most. That’s a benefit you won’t get with investments, where it can take a day or more to get your money into your hands.
• Saving up for short- to mid-term goals. If you’re looking to save for a vacation or a downpayment for a home or car, and you don’t need to get returns as much as you need to just save up money, then putting your money in a savings account is a smart move. You’ll also develop good money habits by automatically saving a certain amount towards your goal every month.

So is saving good or bad for you, or what? The short answer is — it depends on your goals. To find out whether you should pay off debts, invest, or save, you have to have a clear picture in your head of what you want to achieve financially, and which financial goals matter the most to you. Do you want to be debt-free? Concentrate on your repayments. Do you want to grow your wealth? Focus on investing. Do you want money in the bank ready for when you need it most? Use a savings account.

Tackle the responsibilities that are costing you the most money first, then you can concentrate on investing and saving.

There’s no one answer that will apply to everyone. Knowing your goals is the first step to developing a good plan for your money, and it helps you stick to it. Consider your financial situation and decide which financial instruments are the right one for you.