Most people have become cautious about spending and have started increasing their savings to cope with the uncertain economy. But a drastic cut back on spending will only make the economy weaker. This is a classic situation where your personal interests are in conflict with the rest of the financial system.
Arguments supporting greater spending
If people do not spend, there would not be enough money circulating in the economy. Businesses do poorly if people do not buy their goods and services. This leads to more unemployment, decline in the stock market and decrease in incomes.
Cutting back on spending and making extra savings can thus be counterproductive for the economy during a recession. It has been often argued that it is better to save more when the economy is good and use that money during an economic slowdown. When people save more during an economic slowdown, they make matters worse for the entire economy.
Arguments supporting higher savings
According to economists, since the start of the millennium, the rate of savings has hit rock bottom to less than one percent. People have stopped saving money the traditional way by depositing it in a savings account. They invest in stocks and real estate, seeking greater returns, or just spend on goods and services. But when there is a recession, people are cautious and feel that they must have atleast some emergency money if conditions become worse. And there is nothing wrong with this line of thinking, as long as you do not take too many risks.
From your own perspective, it is better to save during turbulent times in order to keep your future secure. This is even more important if you do not have an emergency fund or if your investments have taken a hit because of the recession. The last thing you want is you or your family having to suffer because you did not save enough money.
Whether you should increase your savings during recession or not will depend on your priorities and financial situation. If you are confident about your own financial health, there is nothing wrong in lending the economy a hand by going out and spending your money. But if you are worried about your job or your investments then it’s much better to play it safe and save as much money as possible to deal with possible financial hardships.
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