What is Saving?
Saving is to not use something now, intending to use it in the future. In money terms, saving is income not spent or deferred consumption. It’s calculated by taking income minus expenses. So, if monthly income was $2,000 and expenses were $1,800, the savings would be $200. When I think of saving, I think of setting money aside for one of the three types of savings: emergency, goal, and irregular expense.
Emergency
An emergency is a situation causing immediate risk to health and safety, requiring urgent attention. Life is unpredictable and we all will come across an emergency at some point. Whether it is losing a job or a health issue.
The purpose of an emergency savings is to provide cushion and protection when life happens. Having an emergency savings will allow you to focus on the situation rather than stress about money. Giving you time to recover and heal as you get back to normal.
Emergency savings cover essential expenses when the unexpected not unplanned happens. There’s not a one size fits all for emergency savings, but 3-6 months of essential expenses is the recommended amount.
Goal
A goal is a future envision, result, or experience that is planned to be achieved. We all have things we want to achieve, but until we have a plan, those wants are wishes, not goals.
Planning to save for your goals requires knowing how much money you need and how long you have to save for that amount. For example, say you want to take a trip 12 months from now and it will cost you $2,400. In this example, you would need to save $200 a month to reach your goal.
Goals come in all shapes and sizes and are personal to you. You can have a small goal like a pair of shoes you always wanted or a large goal like a down payment to your dream house. No matter what goals you save for, they are important because they matter to you.
Irregular Expense
An irregular expense is one that is not paid monthly and can also have no set due date. There are a lot of different irregular expenses and many we overlook.
Some are bills like property taxes or insurance premiums. Others can be lifestyle expenses like Christmas Gift or annual membership dues. Then some are unplanned like auto and home maintenance/repairs or insurance deductibles or even replacements of appliances and technology.
These unplanned expenses can often be mistaken as emergencies. Don’t fall victim to this mistake. Review your expenses to identify the ones that pop up or will pop up eventually to plan for them and be ready when they decide to show up.
Purpose
The primary purposes of saving are to protect you through rough times, help you achieve your goals, and plan for irregular expenses. Many people combine saving and investing. However, they are not the same. Savings are held as cash and focus on the short term with low to no risk. Investing is held as stocks, bonds, or other assets and focuses on the long term with higher risk. Don’t skip saving for the sake of investing.
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