ASK Dr. NOET
Are you saving or being miserly?
By Dr. Johnny Noet Ravalo
INQUIRER.net
First Posted 10:57:00 01/30/2008
This comes belatedly but not too late to wish everyone good tidings and great wishes for this year. It's a good feeling (I know, everyone is talking "US recession") and I hope it lasts. So here's hoping that in 11 months all of us can look back to 2008 as a great year of positives.
The holidays --- with our natural penchant for gift giving and food-binging --- got me to thinking about saving all over again. We always stress the virtue of saving because what we save is the treasure that we bring to the future. But what we often forget is that saving, in practice, does not mean that we should stop spending.
The point of saving is not only to accumulate but also to save for something. We cannot minimize for the sake of minimizing. Ibenizer Scrooge was a miser until the three ghosts put cause-and-effect in perspective. He had that privilege; some of us may come to that conclusion too late.
Remember Bert and Al, our tale of two drivers with very different outcomes? Their difference is that Bert allocates for what he and his family needs for now and the future. Al cannot look past the pesos he gets weekly because he has not developed a vision of what he likes to see for himself and his family in the years to come.
Saving is just that: an exercise in forming a vision that comes with a timeline and the huge burden of making subjective decisions. We set aside a portion of what we currently have for our future but if that means not having enough to eat, for example, the medical bills will offset whatever gains we hope to achieve.
I know of someone who no longer takes his car to work. He has reserved parking space at work but he wanted to save on gasoline expense. In so doing, his mobile phone has been snatched twice in a shuttle service. Was it worth it?
We recently met a number of US-based families who willfully extended their housing loans. They could easily have paid off their existing loans but they instead chose to extend their mortgage by five to eight years. This does not require any fancy calculation: the added years into the mortgage means that they would shoulder more interest payments. Why do it? Because US tax regulations allow housing interest to be a deductible tax expense and these families are essentially trading off the added interest payments for the better present-day cash flow that comes from the tax shelter.
I am not sure that I would extend my housing loan if I were in the same position. But these families take that route — by choice — because to them the tax deductions and its cash flow implication is the more attractive option.
Saving is about a net gain but this does not have to be counted in present-day pesos and centavos. As long as we have a clear idea of what we are saving for, we know that there are different routes that we are willing to take to get there.
(Have a question for Dr. Noet? Email personal_finance@inquirer.net)
(Noet Ravalo is a macro-financial economist by practice and profession. He was chief economist of the Bankers Association of the Philippines until 2002 and has since been doing consulting work. Since 1994, he has been asked to provide technical inputs to both the Senate and the House of Representatives on various economic and financial legislation, some of which will have big impact on Filipinos' personal finances.)
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