As a financial planner, I’m commonly approached with this question:
How much do I need to save for my future goals?
In thinking about it over time, it’s become clear to me that savings isn’t always what we think it is. In fact, the line between savings and spending (two seemingly opposite financial actions), isn’t as clear as it seems.
What Is Saving, Really?
When we save, we set money aside for future goals like retirement and vacations, cars and houses, bills that come up annually or quarterly. We also set money aside for short-term needs, such as filling our cars up with gas. In all of these cases, we’re saving money now so we can spend it at a future date.
In other words, even though we tend to think of savings as money we don’t spend, it’s actually money that we earmark for future spending. Deciding to save is deciding to reserve some of your income now for a specific use later. It brings the future into the present.
So saving and spending are not, in fact, as opposite as they may seem. One (savings) works in favor of the other (spending). But that’s where the simplicity ends.
When Savings Gets Complicated: Unexpected Expenses
When we think of saving for future goals, we have to ask the hard question of how much we think we’ll need to save for those future goals. But that’s not the only complexity that exists in savings. Savings really hit a snag when something unexpected happens.
I’ve saved for X, but Y suddenly happened. Now I have to use my money reserved for X on Y, leaving me without money for X.
When this happens (being forced to use our savings for unexpected expenses rather than planned future expenses), we feel like we failed. And that failure can make it really hard to get back on the savings train and build back up. But here’s the thing: using savings for an unexpected expense isn’t a failure – having money to use for that instead of relying on debt is a win. Saving money in the first place is a win. Now, to ensure that the situation ends up even better next time, you simply need to up your planning game.
Think about it this way: if you hadn’t been able to save money in the first place, you wouldn’t have had it for the unexpected expense. This means you can feel good about your ability to save and now use the same good habit to plan more effectively.
Upping Your Planning Game: Plan Your Savings the Way You Plan Your Spending
If saving and spending aren’t as opposite as they initially seem, then figuring out how else to make them work together can be the key to your financial planning. Here’s a new way to look at it:
View all of your income as “savings” until the day you spend it.
Let’s say you get paid on the 1st of the month and have a bill due on the 10th. By not spending the amount of money you’ll need to pay that bill ten days from now, you’re actively saving that money. Now apply that to a trip you’re going to take in a few months or a house you’ll want to buy in a few years. Anytime you want to plan for a purchase, plan your savings accordingly. This is how saving and spending can work together, instead of against each other.
Now let’s look at a wild card that most of us have to deal with: debt.
Debt is the opposite of savings. Paying off debt is the same as saving.
Savings is future spending and debt is money already spent. Since debt is money already spent, the act of paying off your debt is another way to be saving. To maintain debt is to continue paying now and into the future on something you did in the past. But eliminating your debt means you won’t have to make those payments in the future anymore, freeing up your future money for other goals.
Debt is money spent in the past. Paying off debt is the act of using present money to eradicate your past. And becoming debt-free is what enables you to put aside your present money for the future. Therefore, when you plan for paying off debt, you’re also planning for saving.
Understanding How Savings and Spending Work Together Can Change Your Relationship with Money
It’s hard to save money – not just because it can be hard sometimes to find the extra money in our budgets to save, but also because the future feels so far off and irrelevant compared to our present. When you bring your future into your present, then you can beat this feeling of irrelevance that savings can take on.
Deciding on what you want in the future now and actively saving for it is how you can bring the future into the present. Every time you save now for money you want to spend later, you’re giving yourself a piece of what you’ll get later. When you plan your savings the way you plan your spending, the question of getting what you want isn’t a matter of “if” anymore, but instead a matter of “when.” The question is, what’s the first future spending goal you want to achieve?
Image Credit: Sergee Bee