What It Means to Have Savings
Savings Means Different Things to Different People
Some might think that savings is any cash you haven’t spent yet. Others define savings as money that’s tucked away in a money market account or Certificate of Deposit. And yet others would say that their extra debt payments (above and beyond the minimum monthly payment) should count as savings.
Before tackling the question of how much money you ought to save, take a step back and think about how you define savings.
Savings Means Different Things
It may seem like a simple concept, but for people who haven't been savers in the past, it's worth defining very specifically what counts as true savings. Cash that’s left over in your checking account after you’ve paid the bills does not necessarily count as savings, especially if you might use that money to splurge on a fancy dinner or cute shoes in the next few weeks.
Similarly, if you’ve saved $5 at the grocery store, you haven’t necessarily increased your savings, although you have refrained from spending more than you otherwise would have. Saving is not the absence of spending. Instead, it is the intentional act of setting money aside for a specific goal or purpose.
Budgeting for Savings
Budgeting comes into play for many people who want to save a certain amount of money, such as a down payment for a house, money for a new car, or gifts for the holidays.
Once you've defined what are you saving for, how much you need to save, and when you need that money, you can create a budget, or a roadmap, that will help you save the right amount for your important financial goals.
Some examples of savings goals include:
- Building an emergency fund
- Saving for holiday celebrations or special gifts
- Saving 10% to 15% of your income for retirement
- Saving 1% of the purchase price of your home, each year, into a "home maintenance and repairs" fund
- Putting aside $40 per month for future car repairs
- Creating a college fund for your kids (or yourself)
- Keeping enough money on hand to cover all your insurance deductibles (health insurance, homeowner's or renter's insurance, disability insurance) so that, if you need to make a claim, you can easily pay the deductible without worry
Example of a Savings Plan: Jennifer's Wedding
Jennifer wants to save $15,000 for her wedding. She's single, but she knows that she wants to get married someday, and it’s better to start saving early.
Jennifer decides that she wants to be financially prepared to get married in five years, which is 60 months away (12 months x 5 years). Since she wants to save $15,000 for her wedding, she’ll need to set aside $250 per month ($15,000 / 60).
But there’s just one problem: Jennifer also wants to save for her honeymoon. Where will she find the money?
She decides that she wants to contribute $3,000 toward her honeymoon. Over the span of 60 months, she’ll need to save an extra $50 per month.
In the past, Jennifer has saved money at the grocery store by buying store-brand items, in-season produce, and stocking up when there are store deals. But she’s never formally put this money aside. Instead of depositing this money in a savings account that’s earmarked for a specific goal, she looked at it as extra money to spend on discretionary items, like a new pair of trendy shoes.
Now that Jennifer has a specific goal, she also has a stronger concept of what it means to truly save money. These days, every time Jennifer goes to the store, she looks at the bottom of the receipt to see how much she saved on her shopping trip. Then she deposits that money into a sub-savings account earmarked for her wedding and honeymoon savings goals. By doing this, she sets aside the extra $50 per month, which is enough to allow her to reach her honeymoon goal in addition to her wedding budget goal.
Jennifer learned that saving money for a defined objective is motivating and she understands that the true nature of saving means accumulating money in an account, not just clipping coupons. Now that she has identified her goals and her timeline, her finances are on track to help her achieve her dreams.