Savings: Impact to the economy
Joefel Ortega Banzon (The Freeman) - September 23, 2019 - 12:00am

CEBU, Philippines — “Do not save what is left after spending; instead spend  what is left after saving” – Warren Buffet

But why is it so important to save money? How does saving affect the economy?

The importance of savings is actually quite simple. If you have set aside some of your hard-earned money for emergency purposes, you will have that sense of security because you have a contingency plan in place in case something unforeseen happens.

But what is the difference between saving and investing?

Investing is putting in your money on stocks, bonds, real estate, and mutual funds with the hopes that your money will grow. Savings on the other hand is somewhat personal, wherein you set aside money for emergencies or for future purchases.

But is it really ‘just personal’ or does it really matter to the economy?

Economic contribution

Acting Deputy Director Joselito R. Basilio of the Department of Economic Research of Bangko Sentral of Pilipinas (BSP) said in a recent event that “savings is very important to the economy. If we save, those savings that we have in the bank are pooled by the banks and it becomes a fund.”

He said people intend to save not because they have extra money, but because they know they will be needing it in the future.

However, not everybody knows that the money set aside and deposited to the banks as savings account and other forms of investments is not only important to the account owner personally, but it also contributes to the nation’s overall economic growth – but how, exactly?

As Basilio mentioned, pooled savings become a fund that banks can lend out to businesses for expansion, otherwise known to economists as ‘investment in capital goods” and when businesses invest in capital goods, the economy grows.

Take for instance, a company borrows money from the bank to open a new branch. That particular branch increases the company’s output as more goods are traded, thus creating movement in the economy.

Moreover, building that new branch also generates indirect impact to the economy as it provides income to a host of other producers ranging from the construction firms and a multitude of suppliers.

The construction activity already creates jobs not to mention the new staff the company will be hiring to man the new branch.

Employment spells wages, which in turn will flow back to local businesses in the form of retail purchases.

Savings therefore creates a ripple effect that is vital to economic growth.

But with the current low interest rates for savings account in the banks, the public seems to shy away from keeping their money in the banks and hold on to it instead or worse, fall prey to investment scams that promise ‘too-good-to-be-true’ returns.

GLOBAL PHENOMENON

Mary Rose A. Contreras, Deputy Director of the Payment System Oversight Department of BSP, said “globally, the rates are really falling and in some areas like Europe for example, they are also having a hard time because the rates are really low now.”

She cited Japan as in fact having negative interest rates, “but people still save because they want their money to be parked somewhere safe.”

Contreras stressed that there are still other reasons to save, not just the interest rates, reiterating that it is a global phenomenon that savings interest rates are really falling.

“In the Philippines, we have savings rate of .25% to .5% , if you go for the most electronic oriented banks, they could offer to as high as 3%-4% for the regular savings deposit because they are electronic, they work digitally so you could access them via a mobile app,” she said.

She further explained that non-electronic oriented banks or the conventional banks have higher operational costs, which often reflect in their interest rates, whereas for those using technology, such as fintechs, the cost would be lower and that is given back to the depositors.

For the top banks in the country, the interest rates for savings range from .1% to 1.25%:

BDO Unibank, Inc. (0.25% to 1.25%), Metropolitan Bank and Trust Company (0.25%), Bank of the Philippine Islands (0.75% - 0.25%), Land Bank of the Philippines (.1%), Security Bank Corporation (.50% - 1.20%), Philippine National Bank (.100% - .250%), Union Bank of the Philippines, Inc. (.10%), Rizal Commercial Banking Corporation (.25% - .38%), and United Coconut Planters Bank (.25%).

Given these interest rates, Contreras said banks are now actually offering more options for the depositors to be able to get what their money’s worth.

“Still, savings is very important. It moves the economy. In terms of loans, for collateralized loans such as real estate, the interest rate is around 10% because these are collateralized, the risk is lower because if the borrowers fail to pay, they could actually sell the collateral and recoup their investments. But for non-collateral loans, that’s a huge risk for the banks so they would want bigger returns,” she said.

Contreras added that “savings is still very important, we’ve got options now, we’ve got a lot of things going on and we are all in these together. So if we want the Philippine economy to fly, we will fly together.” (FREEMAN)

SAVINGS WARREN BUFFET
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