Beginner’s Guide to Saving

Consistently saving money, is easily the most fundamental aspect of personal finance, yet most people treat it like a yellow traffic light. Everyone knows what they’re supposed to do, and they understand why, but still take the chance and speed right through it. And therein lies the problem, too many people find themselves in a situation where (hopefully) they know they should be saving money for emergencies (or vacations, saving isn’t only for bad events) yet they ignore the reality of how necessary a properly-funded savings account is.

It may not be the most glamourous topic in all of personal finance, but it is no less important to pay attention to. Everyday you go without making sure that your savings is being properly funded, is another day you continue to play Russian Roulette. As many people come to find out, eventually your luck will run out. It is seldom a matter of “if”, but when.

Saving Money vs. Investing

I’m sure you’re reading this you are thinking to yourself, “well I may not have a savings account. But all the money I would put into a savings account is being invested, so I’m okay”. As rational as that line of thinking is, it is deeply and fundamentally flawed. And the issue with this reasoning starts with the role each concept plays in your financial life.

Although both saving and investing are concepts everyone is generally familiar with, there are some key distinctions that can not be ignored. These differences can ultimately mean a peaceful night’s sleep while others are panicked about the economy (like right now with the fears of a recession), or being amongst the panicked (because you just realized your financial house is not in order).

Saving is based on the understanding that, “someday” you will be faced with an event (or expense) that you may (or may not) have foreseen. So at it’s core, saving is rooted in being prepared for the unexpected. Which is why most associations regarding a savings account are about an emergency fund, or rainy day fund. Because it does not take much life experience to know that eventually something will come up that may cost more than you have on hand (in your checking account), or you may simply not want to pay for it out of your checking account. Saving money is a low risk, low reward money management concept. There is virtually no potential gain, but also no potential loss.

Investing on the other hand is almost the exact opposite of saving. Like saving, investing is rooted in the same “someday” concept. In this case that the anticipation of the projected “someday” is in hopes that the money you allocated to an asset (or assets) will (literally) payoff. And do so in a way where you not only get back the funds you applied to that investment, but also any interest that’s accumulated since you began putting money into that asset.

The difference is most easily seen not only in the expected occurrence of the “someday”, but also in the risk involved. For saving there is essentially no risk, because the money is kept liquid and accessible. For investing on the other hand, there are two differences. First the money is not always liquid and therefore not always accessible, and secondly because the money is placed in an asset there is no definitive guarantee that you will never lose the money you invested.

Saving at Every Opportunity

Saving money is never easy to do. Between the fact that it is not a mandatory expense, and how difficult it can be to put aside money “just in case”, there seems to be no sense of urgency with saving money. And even for those who have willpower that resembles the strength of reinforced steel, there are still traps that are lurking everywhere. For some the traps come in the form of spending an unbudgeted amount on one big ticket item, then justifying it as “I’ll buy this and nothing else for the next two months. So it balances out”. Whereas for others it may be that their trap is spending a little here and there, and not realizing that when everything is accounted for they spent the same as the person who bought the big-ticket item.

It would be a very fair conclusion to say that both instances are indicative of a need for improved budgeting skills as well as a better understanding of the value of money. The importance of which is highlighted by the short-sightedness in both examples. Not only is it a dangerous game to assume that you can overspend now then underspend later, it’s equally dangerous to get caught up in buying many small trinkets that you don’t genuinely need.

The other and less obvious danger lies in a lack of understanding how valuable money is. The short version sounds a bit like this: money gets devalued more and more each year compared to the previous year, and the cost of goods increases (typically) at about the same rate. So to frivolously spend money now on things that don’t increase in value, and not having an adequately funded savings account will ultimately be detrimental to your finances.

What is a Good Amount to Save?

Everyone knows that saving money is tier one priority, and if you don’t know, now you know (thanks Biggie). What is less known is the amount that should be set aside for saving. While the general consensus is to save as much as possible there are some other considerations that should be factored in before you throw your whole paycheck into your savings account and live off bread, and ramen.

Determining the appropriate amount of savings to allocate requires a considerable amount of forethought. Some such factors that should be considered are your fixed needs, lifestyle preferences, income, and financial goals. If you recall saving is not only about emergencies but also for opportunities. And in totality those considerations are highly subjective, not just on a household to household basis, but on a person to person basis. The subjective priorities that you have may not be the same as your spouse/significant other.

Even though all factors are important in their own right, if I had to choose one as the most important factor, I’d easily choose income. This is because if savings was akin to a science experiment, then income would easily be the independent variable. Meaning that compared to the other factors being the independent variable, changes in your income will have a more drastic effect on the overall outcome.

For example, if your job is more seasonal or cyclical by nature then you have periods where you can certainly earn a lot some months, but there are also dry months where paydays get much tighter and less frequent. If this resembles your current employment structure, then making it a priority to set a savings goal of one-year living expenses would be a great cushion given the volatility in your work schedule. Whereas if your job is more stable then you can more easily predict your income for the foreseeable future. And while saving a year-worth would be a great goal to strive for, a more modest goal would be saving a half year-worth of expenses.

Make Yourself the First “Bill”

Too many times people get paid, spend their money, and if anything is left after their spending save the remainder, assuming anything is left at all. The risk with this method, as you can see is that there seldom enough, or any funds left to allocate to saving. Which leads to a severely under-funded savings account, and that is no different than financially skinny dipping prior to low tide.

However, if that example were to be repeated with the emphasis on saving as the first item on the list, then there would be the benefit of an increased likelihood of reaching the savings goal, as well as a better allocation of the remaining funds, since you would have already taken care of the most important “bill”. Most individuals choose a specific percentage to take out each month, like 10% for example.

For the vast majority, prioritizing saving at the beginning of the post-payday checklist will likely require cutting back on some luxuries and pseudo-luxuries you may have grown accustomed to. Hopefully by now, you’ve come to realize that minor momentary inconveniences, in the name of lifelong abundance is a trade-off that Fincense Fanatics are willing to make!

Supercharging your savings

Seeing your investments providing large returns that enable you to enjoy the lifestyle you’ve always wanted is something nearly everyone wants for themselves. And while investing is largely a lot of work on the front-end, none of the back-end gains can be achieved if you did not have investable income. Which stems from having money available that could be put to use creating the future you want. And that means big investment returns are rooted in saving!

One way to begin supercharging your saving is to pay off your credit card debt as soon as possible. Once this is done you can apply the amount you paid to your credit card to the budgeted amount you set for savings. So now you are budgeting for funds that used to go to the credit card debt and savings to all go to just your savings. Alongside responsible use of your credit card, consider exploring credit cards that provide perks that are relevant to you. For example, some credit cards provide cash back or airline miles. These perks are important because you can apply the same “double up” strategy to some of these perks when you use them.

Another way to ramp up your savings is to have a n additional source of income. In which case the funds go almost exclusively to your savings. For example having your regular job and for a few nights a week, do ridesharing, then transfer those payouts directly to your savings. Having a way to boost your savings that doesn’t adversely affect your health, and well-being will be very beneficial over the long term. And the best part is that you don’t necessarily have to do it indefinitely.

Debt or Saving?

Debt is the “gorilla in the room” for most people when it comes to their finances, and to take the analogy further, those same people usually try to navigate around the “debt-gorilla” while simultaneously ignoring the gorilla altogether. And this balancing act usually backfires pretty badly once things start to slip. That being said, mounting debt can absolutely suffocate any attempt to build up a savings, especially if the interest rates on your date are higher than the mid-teens.

The most ideal way to navigate this decision is to evaluate the amount of high-interest debt you have and work to pay that down (or off) as quickly as possible. While also contributing a reasonable “minimum payment” to your savings.

Save $100K, So Says Munger

Charlie Munger, business partner of Warren Buffet, and a billionaire investor in his own right, is credited for recommending saving up $100,000. In his opinion once you have that amount set aside it gives you the freedom to makes decisions that either are not available to others or that they can not take advantage of because of liquidity. For example, you’ll be able to start a business, acquire franchises or real estate, or even make large investments in the stock market.

Frequently Asked Questions (FAQs)

Do savings bonds count as saving money?

Savings bonds in the U.S. are a fairly safe investment, but that’s exactly it, it is an investment. So for the purposes of a savings account, savings bonds are not a recommended instrument for “pure savings”. The nature of bonds are rooted in them being backed by the full faith and reliability of the U.S. Treasury, which means the bonds are essentially guaranteed to never lose money.

Will my money be safe in an online savings account?

In the last few years online banking has taken off in terms of accessibility and overall prevalence. In most instances online savings accounts can be a safe place to store your savings. However, it is vital to ensure that the institution you use is FDIC insured, and has the requisite guarantees that major, well-known institutions have.

When Can I Stop Saving?

While there is no definitive “I’ve arrived” point with having a savings goal, it is important to ensure that as your expenses increase (whether it be because of inflation or an “intentional lifestyle creep”) your savings is still properly funded.