Savings Discipline: Where It Is Plentiful And Where It Is Scarce

By Jack Guttentag
The Mortgage Professor

WWR Article Summmary (tl;dr) When it comes to the economic empowerment of women…we here at WWR believe information is essential. Jack Guttentag aka “The Mortgage Professor” always has some good advice/insight on money issues. I hope the following article gives you a few things to think about when getting your financial house in order.

The Mortgage Professor

Savings discipline is the willingness to forgo spending now in order to accumulate the funds needed to meet a valued objective in the future. The objective is critical because it must outweigh the costs of the discipline required.

-Homeownership as the objective: The objective of home ownership, for example, is a very powerful motivator. It is the reason why the equal payment fully amortizing mortgage is a highly effective instrument for promoting savings discipline. In less developed countries that don’t have modern mortgage systems, prospective home owners must find other ways to discipline themselves.

Liberia, for example, does not have a mortgage system, though when I was there some years ago, I saw many instances of savings discipline directed toward home ownership. The method used, however, was one I had never seen before. They used their savings to purchase cinder blocks, which they piled up on their land until they had enough to start building. This was a costly type of savings discipline. The cost was not only the loss of interest that would have been earned had their savings been deposited in a bank (Liberia had branches of two U.S. banks at the time), but in addition a prolonged delay would result in the cinder blocks deteriorating. Nonetheless, the purchase of cinder blocks protected them against any sudden impulse to spend their savings.

-Nest egg as the objective: Another objective of savings discipline is the accumulation of a nest egg, which may or may not be targeted at any specific use. A good illustration of this is deliberate over-withholding on income taxes, which is aimed at getting a refund at the end of the year. The practice is particularly widespread in the US military. Most over-withholders realize that they are giving an interest-free loan to the government, but they accept that as the price of savings discipline.

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