Calculating Your Savings Rate

[Nutria]

If I save $30,000 for college this year and spend $30,000 for college next year, is that really saving?

It's short-term savings, so that you don't need to borrow (or do without). It's how I pay for my kids' school tuition (public schools here really stink).

Note that I do *not* consider that as part of my "savings rate".

Every dime I make gets earmarked for some future expense. {} This is not "saving" this is just cash flow management. Some do it with credit (a mortgage is cash flow management, credit cards can be but get you in trouble). Some do it with "savings" (the better way).

Sounds like you use You Need A Budget... I do something similar, just with named categories for *only* that which has specific payment dates.

[disneysteve]

If the money is being put aside for living expenses in retirement, I consider that savings. Money in a 529 will be used for the benefit of another person (our son); once that money is put in the 529, I don't expect to benefit from it at any point in the future

I can kind of see that since you are saving but for another person.

You also said you wouldn't count saving for a new car as savings. Isn't that for your benefit? Why wouldn't that count? What if you were retired when you bought that car and paid for it out of the retirement savings you accumulated during your working years? The line gets awfully blurry.

[Nutria]

The line gets awfully blurry.

It does, but only if one insists that there's only one time span for savings. I have:

• retirement,
• short term, predetermined (multiple sub-categories: semi-annual auto insurance, next year's school tuition, etc),
• short-to-medium term, undetermined,
• vacation,
• taxes,
• Very Rainy Day (a mental fiction that I distinguish from "short-to-medium term, undetermined", and,
• job-loss income replacement (another mental fiction).

(No 529, because that money is spent this year...)

[feh]

The line gets awfully blurry.

Yup, it does. Using Nutria's definitions, I suppose when I think "savings", I'm really only thinking about long-term savings.

We're fortunate enough that we can pay for just about all of our current large expenses out of cash flow, so I don't really save for them. Once I'm not tapping my human capital any longer, things will seem very different.

[disneysteve]

I suppose when I think "savings", I'm really only thinking about long-term savings. .

Of course, in our house, saving for a car IS long-term savings. I had my last car for 14 years so I had plenty of time to save up for the next one.

[feh]

Of course, in our house, saving for a car IS long-term savings. I had my last car for 14 years so I had plenty of time to save up for the next one.

I use our EF (which, as I've mentioned before on this forum, really is more of an "occasional large expenses" fund) for such things. If I had to buy a car tomorrow for some reason, I'd be able to.

[kork13]

I tend to define "savings" in a very simplistic way.... basically, if I'm not spending it month-to-month, I call it savings. Based on what those savings are intended for, I just label it with different timeframes (short/mid/long-term). That includes everything from EF, car savings, vacation, home maintenance, and so on (short-term savings), to home purchase or college fund (mid-term savings), or retirement (long-term savings). I'm going to be taking my home out of escrow here in the next couple months, and once we do so, I'll start "saving" the amounts for taxes/insurance in a savings account ahead of the annual payments. Sure, it's effectively just delayed spending/expenditures, but viewed in that light, so is retirement savings.

[avil_saver36]

Okay now you are arguing over semantic. I was saying that the person who purchased(including a lot of my friends who were trying to get me into stocks in 2006), ended up losing 40% of their investments after the stock market crashed. Because they used their "savings"(not retirement) to do this, they got emotional about it and truely ended up losing 10-15k worth of money via stocks (cut your loses mentality). Sometimes speculation goes haywire when you have such a large movement in the global economy.

I agree with Disney Steve that the stock market generally goes up overtime(although we argued the same fact about housing but that turned out to be false)...and I agree that if you just want some money to sit somewhere for 30 years, the stock market is most likely better than your typical savings account.

But we talking about SAVINGS, not long term investments. You shouldn't have to worry about your savings disappearing one day, or accumulate a large amount of wealth on another. This is what you use for your a/c that broke down..that new you car you wanted, or that vacation you are going on. You can't just pull your money out of the stock market whenever you want(especially when it's less than what you bought it for).

Sorry to interject the conversation in the middle. What the people did is classic "buy high, sell low". They bought high BECAUSE the stocks were going up. They sold BECAUSE the stocks went down. That's a weak psychological behavior and those people should never invest in stocks.

Generally, when you invest in stocks, you invest in a very broad portfolio. You should never invest in one (or even a few) company. If you did this, there is a real chance you will be totally wiped out. If you are in a broad portfolio though, how can you lose in the long term? The US is a capitalist country and the companies own the government - not vice versa. If you owned a piece of this broad corporate capital machine, your interests are aligned with their interests - make more money. You are essentially betting that the corporations will remain relevant as the primary wealth creating vehicles in this country over a long time. If you agree to that premise, it's foolish not to invest at least a part of your wealth in stocks.

Secondly, the US has the largest military on the planet. I philosophically don't agree to it, but having such a large military machine gives this country an unparalleled advantage in controlling resources and bringing about any new technologies without competition. The US remains the incubator for the latest technologies and the next generation cutting edge industries. We also have all seen the weaknesses in Euro and China. Frankly, there is no one else. The US stock market remains the primary income generating vehicle for most of the world. If the US companies start to get owned by someone else, then I will worry.

Having said all this, I personally have put a majority of my 401K in stock index funds. Like everyone else, I too suffered badly in 2009 (I have invested since 2005, so near when the market was already high). I however stayed put despite the gloom and doom and I came out of it and have recovered the lost wealth. Also, I prefer to invest in real estate with my after tax savings. I haven't really done any such investments, but maybe in the next 2-3 years, I will buy my first rental property.

The stock markets are not casinos like the naysayers say. There is short term risk, lots of fluctuations, lots of bad things like insider trading and it is also rigged for a certain objectives and is far from the true free market. But as an entire ecosystem, the US stock market as a whole is a very good investment market, and you should consider buying index funds and expect at least modest returns enough to beat the inflation over the long term.

If you have money on top of it, then sure, gamble and take bets on companies you feel will skyrocket in value (example: Netflix up 500% since 2010). However, prepare to lose that money and treat whatever you get out of it as windfall. With these strategies in place, you will not be disappointed with stocks.