Don't Save Just To Spend, especially now!
Coronavirus has changed the financial landscape for nearly everyone. We are all trying to navigate unknown fiscal waters right now. That's why it can be instructive to look to clearer times for lessons that still apply today.
When I was but a lad, I saved up for a car. I worked many months serving fast food, umpiring baseball, and selling things in a store I worked at. At the same time, I had to practice some self-control and not blow all the money on more fun things that were more immediately purchasable.
The fateful day finally came. I proudly checked my bank balance and went to buy the car from someone I found online who seemed honest. I got pretty lucky too. The car was exactly as stated, it was in good condition and the previous owner even took off a chunk of the asking price as I was paying in cash. I was jubilant with my newfound independence and adulthood.
What young, naive Zach didn’t think about was the recurring costs associated with this purchase. I kind of forgot about the yearly insurance. Regular maintenance was a new experience as well. I even learned an expensive lesson on how much the government takes to register the car and get a license plate. I knew about gas, but that was pretty much where my understanding of the costs of car ownership ended until the real world smacked me upside the head.
I don’t write this so you can pity me. After all, I got a car as a teenager, which is something that many people around the world don’t get to do (even if it was pretty ugly!). I wasn’t taken advantage of by anyone. There were two problems though. The first was that I allowed my focus on the upside of independence and leaving childhood behind to blind me to the true costs of car ownership. The second is that I worked really hard for months, and sacrificed a lot of other opportunities in order to buy a car that immediately kept depreciating and needing money injections in terms of regular maintenance, insurance, gas, and taxes.
I hadn’t really saved money at all. I had just deferred spending to a later date. When we “save up” money just to spend it later, it’s not actually saving money.
This slightly odd definition of saving money is based on the idea that in order for us to actually save money, we need to not spend it, especially on liabilities like cars, vacations, clothes, or anything else that doesn’t generate income. To save money, that money needs to either go into an emergency fund that hopefully earns some safe interest, or into buying assets like stocks, bonds, or real estate that make us more money than they cost. When we wisely buy assets like this, our money helps build the freedom and safety of our future, where we aren’t reliant on a job that can fire us or be outsourced.
This is especially important right now, with the uncertainty that Coronavirus has placed firmly in all of our laps. We are seeing just how fragile our jobs can be. Now is the time to be putting off plans for big purchases until things are more settled. It's not "never", it's just "not now". Build your emergency fund, then maybe, if you're safe for 6-12 months of expenses, think about investing while prices are still low, but first, get your cash situation sorted.
If we buy expensive liabilities like cars and houses, often those become financial vampires attached to our wallets as the hidden or unrecognized costs continue to drain us for years to come. This is even more dangerous now when we can't be sure that we will be able to pay those bills.
Don’t get me wrong, it’s better to buy things with money we actually have because we’ve “saved up” for it than to just put it on a credit card. The credit card route is doubly dangerous because not only do we have the repeating costs of maintaining whatever expensive thing it is, but we also then have to pay exorbitant interest rates on the card itself. Here in the UAE, that can be up to 45% per year. So if your options are “saving up” for it or putting it on plastic, by all means, save up! But don’t fool yourself that you’re actually saving that money. All you’re doing is just putting the payment off to a later date. Saving our money "for real" in the time of Coronavirus could be the difference between riding out the storm and being homeless.
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