What Are We Saving For? Top Four Reasons We Should Save

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“The faces all around me they don’t smile they just crack
Waiting for our ship to come but our ships not coming back
We do our time like pennies in a jar
What are we saving for”

(Believe by The Bravery)

What Are We Saving For?

What are we saving for? It helps to know why we are socking money away each week. It motivates us to keep going when life’s obstacles or temptation gets in our way. That new pair of shoes. That incredible new car deal. That opportunity to travel the world on a whim. All of these situations vie for our precious dollars so it helps to list, specifically, what we are saving for. Here are the top four reasons to save money in our budget.

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Emergency Fund

First and foremost is an emergency fund. This is money set aside for true emergencies. An emergency fund is the number one way to keep out of debt. The most successful people I know have the rules written out that both define what an emergency is and how much can be used toward that end. Emergency to me means something that threatens my family, my health or my method of providing for my family. Nothing else.

How much emergency fund is enough? Where do I keep my emergency fund? These are both good questions and the right answers depend on the temperament and situation of the family in question. Most pundits agree that somewhere between three months and twelve months of expenses is the right range for an emergency fund, depending on your risk adverseness. Location of the emergency fund can be anywhere from inside your mattress to secure investments, but key to the location is that the money needs to be accessible and have low risk of losing its value. When you have an emergency, the money must be there.

I won’t leave you here with no specifics. For me, that looks like $60,000 in a combination of savings, mutual funds and very stable dividend stocks in an account that is accessible immediately.

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Retirement Savings

The second reason to save is for retirement. There are many theories about how much and where you should save for retirement but the fact remains that we must prepare for life after full time work and/or old age. It is not our children’s responsibility to take care of us when we are old but our own. How much do we save? As a general rule, target 25 times your annual expenses as the amount you want for retirement. And though this amount varies for each individual, there are some smart rules to follow:

  1. Start saving for retirement early, letting compounding help you meet your number.
  2. Take advantage of tax preferred accounts like 401K, SEP and IRA accounts to minimize taxes
  3. Take advantage of employer matching plans and/or other employer retirement benefits

For me, that’s $1million, in a company matching 401K program with a 2% employer match on contributions.

images-3Generational Savings

For those raising families or expecting to raise families, we need to be saving for known children expenses, including school, marriage, cars and other events (think travel abroad) that are assumed to occur. For most of us, this can be done over many years so a slow and steady savings can meet your needs. Why not start savings accounts for each child on the day they are born? I recommend putting $75/month aside for each child from birth. Easy and by using auto-drafts between my bank and investment accounts, I don’t even see or feel the money leaving my account. Where should we save this money? 529 Plans come to mind. Also trust accounts. But they should be separate from our day-to-day funds and take advantage of tax preferred accounts if we know the money will be used for higher education.

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Short Term Life Savings

Life happens and it can be expensive. All of us have autos, furniture, appliances and other items that wear out or need upgrading over time. We need to be saving for these eventualities. Since these savings are short term in nature, less than 10 years, the money needs to be invested in something that is safe but hopefully returns more than the cost of inflation. Maybe a safe low cost, low turnover mutual fund or an ETF. I found for me that saving $450/month in an index mutual fund allows me to have sufficient money available when the refrigerator breaks, (it did last month), or the air conditioner goes (it did in July).

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Total It All Up

What are we looking at when it comes to savings as a percentage of net income? When you add it all up, it really is between 15-30% of our net pay. Wow! Some people even suggest it should be 50% of our net pay. That’s a lot. But is pales in comparison to the debt, worry and anguish that comes when “life happens” and we don’t have funds set aside to deal with them. What is the alternative? Student debt? We know how that is not working out. Buying cars on credit? Ouch. Working forever? That might be your desire but it would be nice to do it because you want to and not because you have to.

Going Back To The Song: “What Are We Saving For?”

Having focused savings to meet our life needs gives us direction and purpose. Seeing progress in each account each month motivates us to keep working toward the goals. What are we saving for? We are saving for emergencies so we don’t go into debt. We are saving for retirement in our old age. We are saving to put our kids through school and set them up for life and we are saving for those things in life that matter, like air conditioning, autos and a microwave oven (mine broke in May). This dedicated savings approach allows us to direct our money to our goals instead of wondering where our money went when we need it!

 

Need more help with your savings? Try this GREAT resource. Click the link and SAVE!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

3 thoughts on “What Are We Saving For? Top Four Reasons We Should Save

  1. Hello!
    We are big time savers!l, but just use a basic savings account. We made a spreadsheet to account for how much we have saved and what it’s for. For example, we have our emergency fund, are saving for multiple vacations, contribute some money for home improvements, etc. It’s all lumped into the same account and we use our spreadsheet to keep everything separated. Our next step is to do what you suggested and find other ways to save money that might get us bigger returns. Great article!

    Liked by 1 person

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