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!