Category Archives: saving

Save first. But don’t stop there.

— Me.

“Pay yourself first”

“Save 10% of your income”

“50/30/20 budget”

SO many little quips revolve around saving money. I feel like the implication is that they somehow summarize everything you need to know to handle your money well.

But that’s bogus! Money is complicated. Or at least our lives are complicated so the way we choose to deploy our money is also complicated. That’s why I think we need to think with a little more nuance about what saving our money is for and what it can never accomplish.

FIRST: Why saving money is great essential! And a little childish…

Spending everything we make (or more) is a losing proposition. We can never catch up, pay off debt, create a secure financial footing, build wealth, or hope to have the option of retiring from full time work. If that’s the place you’re currently in: no shame and no blame. Not from me, not from yourself, not from anyone else on the internet. Yes it’s an objectively bad habit to be in but shame/blame/built aren’t going to help change things.

So we are left with the next logical step which is to save some portion of our income. I.E. intentionally spending less than we make so we can set it aside. Wisdom. Delayed gratification. All that jazz. But hearing things like “pay yourself first” honestly has only served to cloud my mind in years past. What the heck is that supposed to mean!? (I finally learned that it is just a cryptic way of saying you should save some money before you start spending it on non-essential items)

I used to save money in a wooden and plexiglass kids bank shaped like a dog. His belly was see-through since it was made of plexiglass and you could see the little coins and bills piling up over time. To access them you had to literally disassemble the thing with 9 tiny screws. But that’s what I did countless times! I couldn’t wait to let the money pile up. Having to count it over and over I’d grab a tiny screwdriver and take it apart to get my new total. Then it would get carefully reassembled and put back on the shelf.

Stashing some money in cash or even in a savings account is really not much different than my childish activities 25+ years ago. We know it’s the right thing to do and put some money off to the side. It has no real intent or purpose, but its there and we are doing what we’ve been told is the “right thing”. The problem is that we don’t have much of a grasp on what’s happening overall, which doesn’t allow for intention to be baked into that savings, which limits its power to help us.

We need a general game plan. I’d summarize that as: have an accurate budget, have a plan for debt repayment, and have a plan to grow your wealth. Saving money needs to have a direction into 1 of these 3 buckets or it will be stuck in that aimless, child-like state like my doggy-bank dollars.

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SECOND: Saving is a foundation. But only a foundation

Assuming we have a budget, a plan for debt, and a solid vision for a wealth-building future do we just save as hard as possible? Yes and No.

Saving is the first step in the process of wealth building. We have to hang onto money and not let it fly out the door to subscriptions and restaurants and nasty bills. It is the only way we can stop the cycle of living paycheck to paycheck.

We all need a small chunk of money that is a basic buffer while money flows in and out of our accounts so as to avoid bouncing a payment. This can be as little as a few hundred dollars or as much as a few thousand depending on your comfort level, when bills are paid, and how big those bills are. If you want a good buffer, have everything set on autopsy for the 1st of the month and spend a lot on recurring bills you may need $3000-$6000 as a buffer. But if you’re ok with a tighter budget, have bills spread out across the month, and don’t have many large expenses you could probably get away with $500-1000 quite comfortably.

After a buffer, everyone needs an emergency fund. Actually your buffer is the start of your emergency fund because it’s the bare minimum in whatever account(s) you use. In a real emergency it’s likely the money that gets spent first. But over and above this an emergency fund should be set aside in it’s own account, distinctly earmarked for emergencies only. “Emergency” means unpredictable, accidental, or otherwise out of your control. If it IS in your control or can be foreseen that falls into the next category of “sinking funds” but more on that in a minute.

An emergency fund is directly proportional to 2 elements. 1: What comfort level are we after? 2: What are our average monthly expenses? For number 1, this is literally a matter of preference. Part of that preference has to do with how regular income is for the household. The more variable the income, the larger the emergency fund should be. However, most people outside of commision-only jobs are paid fairly regularly. Number 2 is important because the amount of emergency funds we need to set aside depends on how fast it will be used. If you’re a high income/high spending household that’s much different than a single student living at home.

Rules of thumb for emergency funds: Always have at least 1 month of living expenses. Set a baseline goal after that of 3 months worth of living expenses. If your income is wildly variable, bump that baseline goal to 6 months or equal to the average span of your sales/paychecks. Any more than these amounts and you’re probably giving up a lot of wealth-producing potential! Unless you’re saving for a specific upcoming need: a sinking fund.

Third: Saving for a “sinking fund” (aka rainy day)

This area of saving stands to lift the most people out of the evil clutches of consumer debt and I to the glorious paradise of freedom: saving for big purchases. Wait! Stay with me! Don’t turn away because you just threw up in your mouth a little bit like I did thinking about this particular topic! I know it’s repulsive or at least horrifically boring to slowly and methodically save for a premeditated purchase months or years in advance. I get it. But we have to do something new to get a new result.

We have to do something new to get a new result.

-Me…again

If you bought a house and expect the air conditioner to kick the bucket in the near-ish future but don’t save for it, that’s just silly. (This is what my wife and I did by the way, we bought that house. 3 years in and the old thing is still somehow functioning!) Or if the current vehicle is steadily creating more and more bills from the mechanic shop we have to acknowledge that reality with a plan. And plans often take time to come to fruition.

We are responsible for our financial futures so it’s our responsibility to forecast the big expenditures. Making a quick list in a phone app or notepad with the impending biggies for the next 1-3 years can add huge amounts of perspective. With it, we are better able to act in the present. “Can we afford to go on that 2 week cruise” becomes easier to answer if Christmas is around the corner along with a new washing machine.

Keep your list handy and update it often. It’s easy math to figure out how long it will take to save for an upcoming purchase. (The math is easy. The saving is harder!) Let’s say an expense is coming up in about 5 months. It is going to cost around $900. $900/5= $180, so every month from now until the big purchase we need to set aside $180 and not touch it! That can be the hardest part, seeing the funds accumulate and leaving them alone, destined to fulfill their true purpose.

Saving for these bigger expenses can take a lot of the sting out of them plus it saves huge amounts of interest in the long run. If you charged that same $900 on a credit card with a 19% interest rate and only paid $50/month, it would take you almost 2 years to pay it off! (22 months of torture, knowing that giant company is taking your hard earned money just because you didn’t save for it in advance). Worse than that, instead of it costing you exactly $900, it costs over $1067!

Fourth: DON’T. STOP. THERE!

So far we’ve established significant security by way of cash savings. (By cash that of course includes and presupposes using a bank and a high interest savings account…not literal paper currency.) But stopping here is why “saving” can be terrible. Stopping at saving and choosing not to invest our money grossly limits our wealth building potential.

CALLING ALL MILLENNIALS: Do not stop here!

Lets review a few stats:

Yes, 58% of millennials have less than $5,000 in savings. That’s not an insignificant sum. But its not massive either. The problem is that saving money is where many of us stop. We think that is the proverbial finish line. To have a lot of cash piled up like Scrooge McDuck means we are secure.

60% of millennials and Gen-Zer’s define financial success as being debt free. Again, in concert with a pile of cash this “feels” like an indicator of success or completion. We want to have zero debt and the foundation of cash at our fingertips. This is not a big enough or accurate enough goal. We need to think bigger!

Millennials have an average net worth of $8000. Here, we start to see a little more into the depths of the problem. Having that cash-heavy plan that is focused on accumulating more in the savings account and paying off all those debts leaves our growth at a snails pace. A net worth of $8000 means we are barely above ZERO. And without investing we are doomed to stay near there. Your wealth accumulation is limited to your earning power if you refuse to invest. (Sources: https://www.businessinsider.com/average-millennial-net-worth-compared-to-other-generations-2019-5)

21% of all millennials on average have invested less than $500. Ever.

Overall, 54% of millennials have invested less than $5,000.

So that’s a total of 75% of “us” that have only parted with between $0-$5000. We are not setting ourselves up for the kind of future we want. (This isn’t the time to discuss income inequality for younger generations as compared to previous generations, but of course that plays a large role. Regardless, the stats show that most younger people are very conservative with their financial planning, detrimentally so). (Source: https://finance.yahoo.com/news/43-millennials-aren-t-investing-090000387.html)

Your wealth accumulation is limited to your earning power if you refuse to invest.

-I’ve got to find someone else to quote. Me again.

Instead, if you take a tiny step into the world of responsible investing through an employer sponsored 401k, a personal Roth IRA, or similar tax advantaged account, your wealth accumulation powers are compounded and multiplied far beyond the amounts you are paid every month. Many of us are too conservative in the wake of 2008-2011. We saw people who were “investors” lose a lot of money and feel determined to be wiser than they were. But think about how vague that is: who are these investors? What were they invested in? How diversified were their investments? How much is a “lot of money”? Did they make that money back over the last decade?

It’s like your first breakup. It hurts, its terrible, its debilitating…for a time. But if we resolve never to be hurt again and thus rule out all relationships with human beings then we also miss out on the beautiful intimacy, joy, growth, and love they very often bring.

Our investments will hurt us a little from time to time but over the long haul they will do so much more good than harm. We need to do a little research, approach things carefully, then break up with “Savings” and marry our newfound love “Investment”, never looking back. Yes this analogy got weird fast, especially because we need to continue to save along the way but you get the point.

One more quick example:

Jill and Betsy are twins. They mirrored each-other’s educational and career paths. Both were hired for identical jobs, have the same costs of living, and the same income. Jill is a traditional millennial and saves $500/month after paying bills, making debt payments and saving for some larger purchases. The money goes directly into her savings account at the bank where she’s had an account for most of her life. “Investing is risky” she tells herself. She can’t afford to risk the hard earned money she makes so she keeps it “safe” in cash. After 30 years, Jill has contributed $180,000 to her savings! Nice work! However, the bank has not appreciated her diligence and the trivial interest rate of 0.1% they offer has only gained her an additional $2,718.

In contrast, Betsy is a non-traditional millennial and reads a few books, listens to some investing podcasts and checks out an interesting new blog called “Abacus Personal Finance”, all finally convincing her that investing is the way to go. She opens a Roth IRA at a brokerage with zero fees and shovels the same $500/mo into an index fund tracking the whole stock market. After 30 years, Betsy has contributed the same $180,000 her sister Jill did. But the results of her investing are astonishing. She has a balance of $1.09 MILLION! What a massive difference! The companies she invested in through her index fund have rewarded her with a cumulative $910,000 in interest!

We cannot afford to stay stuck in our “savings-only” mentality. If we do it will be the worst limiting factor for our financial futures despite an otherwise solid game-plan.

Stick around for more posts in the future on investing and just how easy it can be to get started!

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My Personal Capital Link (We both get $20 if you use it!): https://share.personalcapital.com/x/sLcqkA