Is Spending Good for the Economy? Should We Save or Invest?

Money has always been the prime driving factor of any economy since human settlements started to be sophisticated. From the barter system to the current complicated transactions, the value of services and objects has always been a determining factor. And this value is satisfied today largely through the use of money.

As our economy goes through its highs and lows, it is inevitable that people get confused as to whether they should spend money or save money. This is also because of the fact that there is an unending cycle caused due to the necessity to save money to buy services and to spend money to buy services.

We have always been taught to save money as much as we can. The more we save and the less we spend, the better will be the financial security and stability of our economy. This is something that is constantly fed on to us.

However, Economists across the world have a different opinion in this regard. They say that consumers should strike a balance between spending and saving. It will be harmful either for the individual or the economy if this balance goes off.

Why you should spend money to Support the Economy?
Things to know before you spend to Support the Economy
Why you should save and invest money to Support the Economy?
Things to Know about Savings

Why you should spend money to Support the Economy?

As far as the economy is concerned, consumer spending is a very important thing to keep it stable and better. Had the rich people of the past and present decided to save their money in their closet without spending it, there would have been absolutely no progress in the economy.

The national economy improves only when there is a healthy flow of money through all units of transactions. This is because when you make any kind of large purchase like a house, car or shop; it creates a ripple effect in the economy. It will start to benefit the people associated with the industry and the other local businesses. This is due to the circular flow of money in the economy. Your spending will become another person’s income and vice versa.

Lack of consumer spending can even lead to an economic slowdown. This happens because of the before-mentioned ripple effect. When money doesn’t flow, companies will be unable to reach their profit margins, there will be losses, it will in turn affect the incentives and salaries of the employees which will further affect the people who are dependent on them. Like drivers, house helpers, street vendors etc.

When that happens, the purchasing power of people is affected which will adversely impact the supply-demand nuances of an economy. It can even lead to a recession when left unchecked.

Spending also does not mean that you should use up all your money. It should be in ways that will benefit you immediately or in the longer run. It should first satisfy all your needs. When it comes to wants, you need to analyse what all you actually have to spend for and take a decision that best suits your conscience.  

Things to know before you spend to Support the Economy

Check your surroundings

The fact that you should spend money does not mean that you should do it blindly. There are a lot of things that you need to consider before that. The spending capacity of every person varies, and it is based on this capacity that one should control their spending.

Career and Spending

The first thing that one needs to look for is the general employment condition. Analyse if the job you are in at the moment is stable, is it in demand, are there any chances of layoffs etc. Apart from that, analyse the growth of your company as well. If it is expanding over the years, then it is a positive sign.

You need to have a backup plan if there are any chances for unprecedented repercussions. For example, uncertainty is more if your company depends on something external for their expansion like weather, any particular raw material etc.

Family Planning

Your spending should also depend on the nature of your family. Have a thorough analysis of the future plans of your family, your health conditions and also your parent’s plans. Your spending pattern will vary depending on whether you and your partner are planning to have any children, expecting any large repairs on your assets, potential health issues, or retirement plans of your parents, among other things.

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Why you should save and invest money to Support the Economy?

While we talk about the importance of spending to boost the economy. Let’s not forget that all kinds of spending are not the same. It should have a long-term reciprocal benefit as well. A logical analysis of the economy shows that the route to improved productivity of a nation lies in the improvement of capital goods.

This can be done only when you save your money and invest it in productive activities. However, be mindful that saving is totally different from hoarding. This is the reason why it was said earlier that one needs to strike a balance between spending and saving.

Saving does not mean dormancy of your money. It simply means that it is entrusted with productive activities that will subsequently improve the economy, unlike hoarding.

Things to Know about Savings

People tend to inherently have an attitude to save money due to the constant reinforcement we have had about financial management. However, everybody needs to know about certain nuances and advantages of savings and how they will impact the economy.

Safe haven

If you have good savings means you are better protected against debt. You can cover your unexpected expenses without taking a loan. It is indeed a great relief considering the repercussions that a thoughtless loan can have. Along the same line, it will help you control your living expenses and thereby finish your loans as soon as possible. This means that your ability to recover during an economic hardship is higher and that will further improve the chances of recovery of the economy. It also means that you are better protected when you are living on your own means.

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Inflation and Savings

Savings are not without any risks. Depending on the condition of your nation’s economy the value of your savings can increase, remain constant or depreciate. People who save and invest will have to pay a huge price if the economy goes through a recession. So brace yourselves for uncertainties and losses while you save as well.

Knowing the Difference

The balance that we need to have between spending and saving is the most important discipline that we need to follow to support the economy. To spend does not mean that you should use your money to buy all the things you want.

Neither does that mean that you should donate everything you get. You should be able to analyse your needs and wants. Have a critical approach to decide on which all of your ‘wants’ should you address after satisfying your needs.

This critical approach goes for saving as well. Saving all your money in your drawer does not help you or the economy. For your savings to improve, you need to channelise them in the right direction. Make sure that they are productive activities and will positively influence your savings. It is also important to remember that savings do not equate with hoarding.

Conclusion

As responsible citizens, we need to be mindful of the options we have with regard to supporting our economy. At the end of the day, a healthy and expanding economy will be beneficial to each one of us. When you spend, make sure to do it in a way that is most useful to most people around you. And while saving too, make sure that it improves over time. Let's all do our part to help our nation prosper.

FAQs

How does spending increase economic growth?

Higher government spending will also have an impact on the supply-side of the economy – depending on which area of government spending is increased.

How do you build a strong economy?

Keeping Manufacturing Units in the Country and reducing the cost of borrowing and increasing consumer spending and investment can help in building a strong economy.

Is saving bad for economy?

A rising personal saving rate can temporarily slow economic activity, assuming no other changes to income.