Saturday, 9 June 2012

When Are Your Savings NOT Savings?

I've been thinking a lot about saving lately. How much should you save? Do sinking funds count, ie. saving money for planned future expenses? Or are only things like emergency funds or retirement funds included? All money will be spent eventually, so how far in the future counts as “savings” and what is just “set aside”?

One of the most common pieces of advice is to save 20% of your income (or use it to pay down debt if you have any). This follows the 50-30-20 budget made famous by Elizabeth Warren, which states that you should allow up to 50% or your after-tax income for needs (housing, insurance, food, utilities), 30% for wants (meals out, new clothes, books, music etc.), and 20% should be saved.

The problem is, what counts as 'savings'?

I am currently saving a large chunk of my wages for:
  • Moving to Bristol – just completed funding this.
  • Car repairs (£80/month)
  • Gifts (£20-30/month)
  • Emergency fund (£100/month)
  • Future travel (£40/month)
  • Eventual laptop replacement (£25/month)

Most of my 'savings' are earmarked for emergencies and moving to Bristol, and I don't have a retirement account yet although it is something I am starting to think about. Of course, a lot of the Bristol savings fund will be spent in a few months, leaving me with my Emergency fund as my only true “savings”, which even then could be accessed at any point if needed.

Do savings only count if you will keep them for a set period? Over 5 years? Until retirement? What about people saving for a house, or saving to pay for their child's university education? Eventually ALL savings will be spent!

What do you think? What counts as savings and what is just cash set aside for a short term future purchase?

When are savings not savings? When they are spent!


Justine said...

I think they all count short, medium and long term.

Meanqueen said...

I am thinking savings are either long term or short term, or even medium term as Justine says. I have never saved long term, and by long term I mean forever. Never put something aside for a rainy day.

cumbrian said...

A thought-provoking post, made me stop and think about it.

I suppose anything ear-marked for a specific purpose is savings, it's just the term that's different.

Frugal Living UK said...

I think that saving is an interesting concept. It makes it seem that if you didn't save then you would be spending everything you earn. Once you accept the idea of only spending what you actually need to to live then everything else becomes savings really. Now what you put these towards is entirely a personal choice. Some people save for something specific, some just to have a nest egg or for emergencies. Personally in the past I have been saving for specific things, ie, buying my house in the country with as little mortgage as possible., now, however, I am having to spend most of what I earn because things need doing. As soon as they are done, I will be living as frugally as possible again and the rest will go into savings, which will eventually go to pay more of the mortgage off, besides an emergency fund. So I think that unless there is some specific idea behind the savings then it becomes a little saving for savings sake. Even if the savings are just for retirement. I just wish people would get away from the idea that they have to spend everything they earn, i know lots of people like this and just don't understand them.

Anonymous said...


Having been a reader of your blog for a few months, I'm taking a step out of the shadows. It's an interesting point you've raised about saving.

What do you think about this as an idea? It's an idea that comes from Merryn Somerset Webb in her book "Love Is Not Enough: The Smart Woman's Guide to Money".

1. Have all your salary paid into a savings account.

2. Set up a standing order to transfer your living expenses from your savings account to your current account. This can be a one-off payment each month or split your expenses over two payments each month.

3. Build-up a sum in your savings account that is equal to 6 months of wages.

4. Any savings in excess of 6 months' wages can be transferred to a long-term saving account.

It's an idea. I wish I had known about something like this years ago. I hadn't got much of a clue at your age.

Now I shall make my way back to the shadows......


Scarlet said...

We had several thousand pounds of 'savings' before we moved house.We never actually referred to it as savings - it was just money that we didn't need to use at the time. That money has been wiped out by our house move and renovations, as we used it rather than taking out a larger mortgage. Having a smaller mortgage and paying it off more quickly so that my hubby can retire early was more important than having money in the bank. The decision may come back to bite us on the bum , but you can only ever do what you think is right at the time.

SpanktheMagicMonkey said...

I believe the importance of savings to be the ability to do something when you want and not have to wait an age to obtain it and also that preparation when the times are good always softens those bad times.

It because of this that I have two sets of savings. Short-term for stuff that may come up unexpectedly (car repairs ect) and long-term. The long-term savings aren’t particularly for anything and I’m unsure of what they’re for either but I’m sure they’ll come a time when I’m faced with an opportunity that can then take because I took the time to prepare in advance.

So in response to your question, i think savings and money set aside is the same thing depending on the length of your plan.