I was disappointed this year, as in most years, with the amount of interest I earned on my savings, and it occurred to me that I had earned more by switching from my old energy providers (electricity and gas) to a cheaper one; over a year I will save about £100.
For the purposes of this article, the word “saving” is used in two contexts where finance is concerned: first, meaning “investing”, and secondly, “not spending”. So if I save five pence on a tin of beans, I didn’t spend five pence on the tin of beans that I may normally have spent. But if I then buy something else with that “saving”, it isn’t saved at all — it is spent. If I put it in a tin and when I have enough of these little “savings” to make it worthwhile, I put it into a savings account, I have saved it and it will earn more money.
For instance, if you can save £100 per year on your utilities bills, it is the equivalent of earning interest at 4% (after tax, but still generous) on savings and investments of £2500 for a whole year, or the equivalent of working on average (roughly based on UK average hourly pay) for 12 hours after tax.
Unless I have completely misunderstood how finance works, the actual comparison is much more stark if you take inflation into account.
If you get 5% interest on your savings and inflation is running at 4% per year, then the amount you earn on your savings is actually only 1%, so you would need £10000 in savings or investments to earn the £100.
Based on these figures, whichever way you look at it, it is very worthwhile to cut down on your spending. And there is another, possibly even more important benefit: if you don’t spend, you don’t consume, and if you don’t consume we all benefit just a little bit.
Save £20 on your phone calls here, £50 per month on your food bill each month, £100 off your Christmas budget each year, not buying that gadget that would be nice but that you probably won’t use all that much saving you £200, waiting a couple more years for that plasma TV and saving £1000, and all the other myriad ways of saving (or, rather, not spending) a few pence here or a hundred pounds there.
And the benefit is even larger if you plough those “not spendings” into an interest earning account.
Alternatively, you could work less, or cut your hours and do voluntary work for the rest of the time, or cut your hours and spend those extra hours working on your garden growing your own, cheaper, organic food, and thus saving even more money, not to mention the planet. Food for thought…