What It Means to Have a Savings
The word "savings" is quite subjective. Here's the real definition
Some think that “savings” is whatever 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 we tackle the question of how much money you ought to save, let’s take a step back and figure out how to define 'savings.’
What are Savings?
Your savings consists of money you’ve set aside for a specific purpose.
Cash that’s left over in your checking account after you’ve paid the bills does not necessarily count as your “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 by a single penny. You’ve refrained from spending more than you otherwise would have.
But saving is NOT the absence of spending. Instead, saving is the intentional act of setting money aside for a specific goal or purpose.
Budgeting For Savings
It is where budgeting comes into play. When you've defined your goals (what are you saving for?), your amounts (how much do you need to save?) and your deadline (when do you need that money?), you can create a budget -- a roadmap -- that will help you save the right amount for the right goals.
What are some examples of savings goals?
- Build an emergency fund
- Save 15 percent of your income for retirement
- Save 1 percent of the purchase price of your home, each year, into a 'home maintenance and repairs' fund
- Put aside $40 per month for future car repairs
- Make a car payment to yourself
- Create a college fund for your kids (or yourself!)
- Keep enough money on hand to cover all your insurance deductibles (health insurance, homeowner's or renter's insurance, disability insurance). This way, if you need to make a claim, you can easily pay the deductible without worry.
An example of Actually Saving Money:
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 take a $3,000 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. She thought she “saved” in the sense that she refrained from spending, but she didn’t literally “save” in the sense of depositing this money in a savings account that’s earmarked for a specific goal.
But 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 towards her honeymoon goal. By doing this, she sets aside $50 per month, which is enough to allow her to reach her honeymoon savings goal.
Jennifer thought that she was "saving" at the grocery store before. In fact, she was simply refraining from spending. She wasn't saving that money for any objective. Now that she has identified her goals and her timeline, though, her finances are on track!