All You Need to Know About Savings
Introduction
Making money is essential to one’s life. Kids use their cents to buy candy after school. Teenagers enjoy inviting their friends out for an ice cream. Young adults enthusiastically bite into their 15-dollar cheeseburger after a late-night dance. Parents take their family out to the most agreeable city restaurants and grandparents cook the nicest 40%-off-the-chocolate cakes. Altogether, food money is a substantial part of daily life.
Income drives your household. However, if income is the gas you put in your car, saving is the oil that keeps the machine running. Meaning, you do not need to refill it all the time, but it must always be at a certain level. You know, just in case.
This article will give you an overview of what you need to know about savings to get started. (We promise after reading this you will have all the information you need to keep your oil tank full and order this extra dessert the next time you dine out.)
1. What is saving? (What saving is not.)
First, let’s make ourselves clear about what saving is and, most importantly, about what saving is not. Here is a thorough definition of ‘saving’ from the Oxford Languages Dictionary:
- an economy of or reduction in money, time, or another resource.
- the money one has saved, especially through a bank or official scheme.
As you can see, saving is merely putting money aside just in case. Saving is not at all about investing. However, the hypocrisy of it all is that the best saving solutions do include investments. You can still keep extra money under a mattress, but due to inflation your savings will lose in value over time. Therefore the best option remains to place this money in a bank or savings account, as the second definition states it: ‘the money one has saved, especially through a bank or official scheme’.
What concretely happens when you put money on a bank savings account is the following:
- you give the bank a percentage (yes, it is important to reason in percentages – but we’ll talk about that later) of your monthly income
- the bank ensures you a certain interest rate
- the bank will be trading and investing the money you gave it
- when you withdraw your money you get your initial savings + the gains from the interest rate guaranteed by the bank.
At first glance, this solution is the most cost-effective one because:
- you do not have to know anything about investments
- your only duty is to place money
- you get some extra money literally doing nothing.
What if we told you there is a third option, which might suit you even better than the two previous ones? We will get into that later. For now, let’s seek the big why. Why should you be saving money?
2. Saving, what for?
This question might look simplistic. Why would you want to save money? Obviously to have more! Sure. But why would you want more money? If your income is sufficient and you can provide for yourself and your family, why would you need more?
There are three major reasons for saving. Each of them is located on three different timeframes:
- to stock (short to mid-term savings)
- to build a project (mid to long-term savings)
- to pass on a legacy (long-term savings)
We are not going to list out all the specific reasons related to each of them. Instead, we are going to play a game.
Below is The Story of Finn T. You will tell us, in the comments, which expense (highlighted in the text below) belongs to what type of savings (1 for stock, 2 for project and 3 for legacy). That way, you will grasp the idea better. Ready?
The Story of Finn T.
The Setting
Hi, my name is Finn T.
As a kid I used my wealth (cents) to buy candy after school. Later, my income (pocket money) grew according to my age and I was able to invite my friends out for ice cream. As a student, I also got my fair share of fun buying $15-cheeseburgers after a late-night dance.
Now that I have grown into a responsible adult, I find it a little challenging to manage my budget. I mean, it is complicated to conciliate ‘responsible’ and ‘fun’ expenses.
I recall my parents used to take us (my siblings and I) to very fancy restaurants. I really enjoyed it and, honestly, I think life should always be that way. We should enjoy spending the money we earn!
On the other hand, my grandparents used to be very careful with money. To the point where the week-end cake’s flavor would depend on the weekly supermarket promotions.
I used to think that was a little miserly until I started earning my own money and figuring out buying into the promotion system can help in saving quite a bit…
Back in college, I had a friend named Steve. Steve was an entrepreneur. He dreamt of starting his own business.
To be honest, I envied Steve a little… I was not as assertive as he was. Even if I had a few business ideas, I would never have had the courage to get started by myself at the time.
The Exercise – Part 1
This is why when he came to me asking to borrow some money, I gave him 30% of the money I had aside (A).
Steve had a sister: Julia. Julia was pleased I helped out her brother. We started dating and, six months later, we officially moved in together.
I found a job in an accounting firm and it paid quite well. However, I did not expect my house move to be so costly. Property tax, bailiff fee, various charges… (B) I was a little overwhelmed. Let alone the fact that we started managing finances as a pair.
As young people, we were not very rich in money but we were in dreams. Julia wanted us to travel all the way through Europe before settling down and having kids. I was not sure I wanted kids yet, but the traveling idea appeared tempting to me (C).
Some rough times then started showing up. One of my grandparents passed away and I was in such grief I burnt out from work. At first, my firm gave me some time to sort myself out; however, they ended up firing me. Julia too became more and more impatient and she eventually left the house.
I was alone and jobless in an expensive apartment. (D) It took me a whole month and a-half to pick myself up and start working again.
Start writing down your answers and make sure to comment below your final score.
The Exercise – Part 2
By the time I recovered, Julia and I broke up and Steve gave me back the money he owed me with some small interest. Although his company did not work out, this entrepreneurship experience helped him get a high-position job in a big firm. On my side, I was officially back on track working a job I did not like in another accounting firm.
I thought about Julia and I’s early discussions. If at the time I was unsure, today, I know: I want kids. I want to travel with them and my future partner. I want to build a life where I will be stable enough to welcome them in. (E)
Furthermore, I started spending more time with my parents. I had been far from them for so long that the last time I saw them I realized how much they had aged. My deceased loved one passed away because they couldn’t do an expensive surgery. I started thinking about my parents, and I would not want something similar happening to them (F).
Thanks to the money Steve returned me, I was able to complete my savings and start a company of my own (G). It demands a lot of time and work, but I know it will eventually pay off and I will finally be able to travel all the way through Europe (H).
Who knows? I might even meet the love of my life there! So, you know, I started saving again… just in case! 😉
Have you spotted all of the reasons Finn had to save money? If so, don’t forget to leave a comment below.
Meanwhile, we are going to follow through the four main reasons why you should be preventive and start saving now.
Saving money for yourself
Money isn’t everything, but, as stated in the introduction, it is the fuel that will keep your car running. Thanks to jobs, businesses, and investments, you will be generating a certain amount of money each month. Instead of spending that money now, we recommend you save it for yourself later.
1. Saving for tough situations
Tough times will undeniably happen and, the day they do, you will be grateful to have covered your basis.
Having money aside may not make these tough times softer. Yet, it will make them bearable.
2. Saving for your future
In order to realize some of your dreams and build the future you desire, you must invest in yourself.
How can you invest money you do not have? Sure, you can ask a friend or a bank. However, not all friends are like Finn T. (lending 30% of their savings). Furthermore, banks generally only lend money (at a significant interest rate) when you provide them with a certain amount.
Saving money for your spouse
When a relationship becomes stable, couples start to merge their financial resources. Meaning, their incomes merge, but also their savings. Thus, they start thinking about their financial management as a pair.
1. Saving for your projects
Couple projects can be as traditional as getting married and buying a house or as wild as traveling the world and raising baby lamas.
What they all have in common is: they must be funded.
Here, saving money is not as much a matter of covering your basis (although, it can be handy if needed), as it is one of establishing yourselves.
2. Saving to build a family
The biggest project couples have is to start a family. Don’t get us wrong, your family can include kids, racoons, daisies or all of the above. However, it still includes other beings you must provide for and take care of.
Your family will need a home, probably a car and some vacation from time to time. As previously mentioned, banks will only lend you part of the money you need to cover these expenses. The rest, you must find a way to provide for it yourselves.
Saving money for your children
The reasons listed in the previous sections become even more urgent when you realize 1, 2, 3, 4… living human beings arrive and are entirely dependent on you.
1. Saving to provide them the best environment
Children are like a chocolate box: you never know which one you’ll get before having them!
Jokes aside, raising children is a life-long task requiring a few pesos on the side.
As babies, children and then teenagers, your kids will require various types of caring. First and foremost a healthy diet, decent housing, and education. But also, leisure activities, sports, trips, schooling…
2. Saving for a debt-free future
The main reason saving for your children is essential is to enable them a debt-free future.
Like yourself, your offspring will have to establish themselves. To do so, they’ll probably attend university, buy a car, travel abroad or to a new city… The possibilities are endless and funding their lifestyle can be challenging.
As a parent, providing them with the right food, the right teaching, the right legacy AND the right amount of money for them to pursue their own objectives freely without having to indebt themselves as they mature is like playing a chess game with destiny… and you must start moving your pawns forward.
The money you are saving for them now will not only help them run the car but will also give them wings to fly.
Saving money for your family
The major reason for saving money, regardless of its actual use, is to provide financial stability to your family. Life itself is expensive, let alone when you aspire to live a well-off one. Emotionally, you might aspire to be happy. Happiness is not a direct consequence of being wealthy. However, one can’t deny happiness is eased when the bank account is full.
1. Saving to provide for your elders
As time passes, you are slowly becoming your family’s leader. Indeed, the older you grow, so do your parents. Your grandparents might be retired and soon your parents will too.
Therefore, the next generation (you) has to take over and provide for 1. your own family and 2. other members of your family which might need financial help at some time in their lives.
2. Saving to leave a legacy
On a sadder note, you must think about possible accidents, deaths, etc. All of these life incidents are costly and in order to keep a strong family basis, it is important for you to be able to face these situations in the best way possible.
Furthermore, chances are that if you can provide the right circumstances (especially a surrounding family) for your children to grow in, they will themselves be able to build a more stable future for themselves and their own families.
3. Smart saving
As we previously saw, putting money aside each month is a basic way to save. However, you can dive in a little deeper in the saving process by practicing smart saving. Here are three methods for smart saving:
1. Balancing your cheque book
Balancing your cheque book will make you conscious of your actual spendings (how much do you spend and on what resources you spend it). We recommend you train by listing objectively all of your spending during a month. Then, during the following month try to forecast your future expenses and see how much they differ from your targets. This first move will enable you to substantially reduce frivolous spending.
2. Separating your accounts
Separating your spending account and your saving account annihilates any spending temptation on the saving side. It also forces you to consider saving as part of your expenses rather than an option. When you consider saving to be an option, you hardly end up saving anything at all! Thus, consider your monthly savings as a salary you are paying to your future self.
3. Reasoning in percentages
Thinking in percentages enables you to distance yourself emotionally from the numbers. Mentally, saying to yourself you are saving $500 each month can feel ‘a lot’… but if these same $500 represent 10% of your income, saying you are saving 10% of your income, on the contrary, feels reasonable. Do not let numbers trick you! You can then slowly increase this percentage in order to target better returns.
We are going deeper into smart saving in this article.
4. Saving solutions
Another way of targeting better returns is by investing your money in the right places. Saving solutions are numerous and it can be quite complicated at first to decide which one is best for you. To help you, here are two common facts:
- the more you invest the more return you get and;
- the riskier the investment the greater the return.
Knowing this, you have to decide where you place yourself.
- What is your relationship to money?
- Are you more scared of lacking money or of missing out on an opportunity?
- What is your relationship to gambling?
- How do you manage money loss?
- How do you manage money gain?
Depending on your answers to these questions (there are no right or wrong answers), we would advise you to focus your investments on a type of savings solution or another. Ideally, you would mix several solutions (listed below) in order to maximize your returns.
Conclusion
Savings is an essential part of budget management within households. Whether it’d be daily expenses, mishaps, future projects or even retirement and legacy, one cannot conceal this opportunity. Everybody has their own saving method. Depending on your personality and financial situation, you may be willing to secure your income or, on the contrary, to risk it to generate more revenue in the future. Investing is a wise way of optimizing your returns. However, you must find what works best for you before investing all of your savings.
Keep in mind that, ideally, you would use a combination of different methods to manage your budget more effectively.
