What do you count as savings?

[disneysteve]

This topic came up in another thread and I thought it might be interesting to get everyone's opinion. Here's the original discussion: http://www.savingadvice.com/forums/g...gross-net.html

So what counts as savings in your mind? Do you count any money that doesn't get spent immediately from each paycheck? Do you only count money for retirement? Do you count money that isn't pre-destined for a particular expense in the future? If you save up $20,000 to buy a car, does that not count as savings because you are going to spend it? Does saving for your kid's college not count because that will be spent?

When you say you save 20% of your income (or 15% or 10% or whatever you are able to do), what do you mean exactly?

Personally, I've often posted that my wife has 50% of her income going to her 401k. I think that one is pretty clear.

As for me, 22% of my gross goes to "savings" which consists of fully funding Roths for each of us ($10,000/year total), $400/month to a taxable investment account that is earmarked for retirement, $300/mo. to DD's 529 plan and the remainder goes to a mix of general investments, replenishing cash reserves as needed and prepaying the mortgage.

On one hand, I can see Jim's point that what we are saving for college is doing nothing to improve our net worth, but still, it is income that we are able to live without. It is money coming in that isn't being spent on our current lifestyle. That makes it savings in my mind, at least to a point. It isn't the same as the money going to the Roths or 401k but it will reduce or eliminate the need to borrow money to finance college so that makes it savings, too.

The same goes for money being set aside for our next car. If we weren't saving that money, when the time came to get a car, we'd have to take out a loan. By saving over time, we will be able to pay cash for the car (or borrow very little for a short period of time). So isn't that savings, too?

What do you all think?

[KTP]

I count the price I paid for my home - the loan amount as savings. Any increase in the value of the home over what I paid I don't count. This seems fair since I pay an extra $1000 a month toward principal.

Doing this has let me justify going 90% equities in our 401K, IRAs and taxable accounts. The other 10% is currently cash waiting on a market dip to buy and get to 100% equities.

[scfr]

What I refer to as savings is:
- Dedicated retirement savings (IRAs)
- Savings that has no particular purpose, that will hopefully be used for retirement. What I mean is savings that, if our world went to hell and we used up our EF, it would be available to pay our expenses. That would happen only in very extreme circumstances, and it would result in a downscaled lifestyle in retirement.

Money that I am saving for a specific purpose (vacation or car) I don't consider "true savings." Having said that, I'd like to make it very clear that I believe in saving for those expenses in advance and believe that it is a very commendable use of one's income. Infinitely better than buying on credit.

I think the argument could be made that extra payments towards your mortgage could also be counted as savings, since they boost your bottom line.

I don't have children so have not pondered the "saving for college" side of your question. Will be interested to hear what others think about that.

[kork13]

I personally disagree with the philosophy Jim brought up in the other thread... It would be as if the only savings that mattered was for that which was never to be seen or touched again by human hands--all the rest is simply delayed spending. While valid, the interim between saving and spending generates a return of growth/interest/dividends.

Myself, if I send money to some other account from my checking, it's savings. If it's not spent, it is (by elimination) saved. Some savings are very short-term, such as cash intended for the purchase of some big-ticket item 3 months from now; other savings are very long-term, such as for retirement some 40+ years from now.

I suppose it's just a difference in the way we view savings. I see savings as an enabling of future spending. The only determining factor is how far down the road that spending is planned to take place. I'm sure there are other ways to look at it, but that's what makes the most sense to me. Because as DS pointed out in the other thread, excepting what is left as an inheritance to heirs, all money saved is intended to be spent, whether in 3 months, 30 months, or 30 years.

[maat55]

I count savings as retirement funds, car fund, EF and bank account cushions.

[creditcardfree]

I tend to only talk about the money we are saving for retirement as a percentage of gross income, which is about 16%.

[msi56]

I like to think of savings as any sort of money that I can easily get my hands on within a month. It can be something that you may have to sell to see the money, provided that you can do so in a short period of time.

[jpg7n16]

On one hand, I can see Jim's point that what we are saving for college is doing nothing to improve our net worth

I kinda disagree with this idea. Saving for college actually does improve net worth, as opposed to the alternative: not saving for college. (same thing can go for car, so just put the word 'car' in the example I'm about to give, or 'house' or anything really)


Assumptions: 1) Kid will go to college one day - let's say in 2025. (whether or not it's been saved for or not); 2) Parent's and student will select a cost effective school (just because you've saved $500k that's available for college does not mean we have to spend it all); in 2025, let's say that cost is $25k/year

So scenario 1: Family does not 'save' for college.

Since no money has been put away, family will need to pay out $100k over 4 year timespan 2025-2029.

Effect: cash paid to school of $100k; $0 earned on investments; net - lowers Net Worth by $100k


Scenario 2: Family saves for college expense in a 529 plan that allows mutual funds, which grow at an average rate of 8%

Family gets exactly $100k on first day of school, by investing 324.65/month for 168 months (14 years). Total cost to the family: $54,541.46

Effect: cash paid to school of $100k; $45,458.54 earned on investments (tax free due to 529 plan); net - lowers Net Worth by $54,541.46


By saving, the family has effectively reduced an inevitable expense by $45,458; and thus increased their net worth over the alternative.

And I could create a scenario 3, where the family is unable to pay for college, so ends up taking out student loans, which run at an average of 5.25% interest, and force the family to pay interest over the next 15 years; interest expense lowers net worth even further.


{Or for the nit-picky; in the process of saving for college, the family has invested in assets that increased in value by $45,458. The increase in the value of assets, with no change to liabilities, directly increases net worth by the identical amount. Assets - Liabilities = Net Worth}

[jpg7n16]

So what counts as savings in your mind? Do you count any money that doesn't get spent immediately from each paycheck? Do you only count money for retirement? Do you count money that isn't pre-destined for a particular expense in the future? If you save up $20,000 to buy a car, does that not count as savings because you are going to spend it? Does saving for your kid's college not count because that will be spent?

I guess I could have just asked this in my last post too:

What do you expect to do with the retirement money one day? Not spend it?


In my mind, saving means setting aside today in order to spend tomorrow.

And I consider saving 20% as saving 20% of my pre-tax salary.

[Hector]

I count money for retirement and investment (that I am not intending to take out) as savings. If I save up 20k to buy a car, I won’t count that as savings because I am going to spend it soon.

I am working for full time for a bit more than 3.5 years now. In this time, there were few incidents that didn’t give me opportunity to have money in savings that I can put into retirement. Incidents like: Before I started working full time, I had some personal loan and I wanted to pay that off before assigning anything towards fully funded EF (EF for 6-8 months). So I did that. After that, I decided to fully fund EF. While doing so, younger brother decided to go to grad school. Since I didn’t have any tuition loans as my parents paid for everything, I decided to help my brother/parents a bit so that we won’t need to take loan for his grad school. So I am doing that. I recently got married and though my in-laws helped a lot financially, I had to spend some money for it. As a result I don’t have anything in retirement yet. One might have chosen to say savings for all these things, but since I knew that I was just preparing for upcoming expense, my thinking didn’t say so. May be that’s the reason I say and it is the fact that I hardly have anything saved up since I started working full time.

I just applied for 401k and gonna contribute a small fraction of our income towards it. I think about it a lot sometimes and don’t know when are we gonna reach to 20% or even 15%. Calculations say its gonna happen in few months, but till it happens, its hard to be relax sometimes!

[disneysteve]

In my mind, saving means setting aside today in order to spend tomorrow.

Exactly. I consider it to be savings if I earn money that I don't spend for immediate needs. If I can set money aside for a family vacation next summer, that is savings. If I accumulate cash to use for a new car, that is savings. If I can fund an account to help pay for college for DD, that is savings. Any money that isn't being spent as soon as it is earned is savings in my mind.

When I hear about people living paycheck to paycheck, I take that to mean that they are spending their whole income when they get it. Whatever they get in this week's check is spent between now and when they get their next check. Nothing is held in reserve - in savings - for later.

I do consider college savings to be savings for the reasons JPG mentioned. Even though the proceeds will go to DD, my wife and I still benefit because we would be helping to pay for college no matter what. If we didn't save in advance, we'd have to contribute from current income during college and/or take on debt to help fund it.

[Bcp1984]

Savings to me is anything that you dont spend in a month for future use, whether it is savings, retirement, fun money, etc.

17 percent to TSP= savings
500-1000 after TSP to savings acct= savings
whatever is left in the checking acct after the month is over= savings
Coupons used at grocery store= savings
etc, etc.

You cant take any of it with you when you go, so in the end, none of it is "saved".

-Brandon

[Mjenn]

I count anything I set aside as 'savings'.

We have a short term savings - we use this for vacations, holidays, birthdays or emergencies.

We have a long term savings - this is just sitting for the moment some invested - it's for big emergencies and an eventual downpayment, we have borrowed money from it to buy 2 cars, a wedding, and one large vacation (all paid back in full) -
Retirement fund - 200 per month into private fund - (the equivalent of a 401K here) - also have retirement fund contribution from work

Kids savings - money set aside monthly for LO

All of this I consider savings since it is all for a rainy day.

[Scanner]

Savings to me would include 529's. They certainly are earmarked for a specific goal but count as savings nonetheless.

I think often financial planners have a hard time digesting the fact that money is a transient thing, that eventually it is meant to be spent (no offense meant, Jim).

[Volkov]

I count anything I set aside as 'savings'.

We have a short term savings - we use this for vacations, holidays, birthdays or emergencies.

We have a long term savings - this is just sitting for the moment some invested - it's for big emergencies and an eventual downpayment, we have borrowed money from it to buy 2 cars, a wedding, and one large vacation (all paid back in full) -
Retirement fund - 200 per month into private fund - (the equivalent of a 401K here) - also have retirement fund contribution from work

Kids savings - money set aside monthly for LO

All of this I consider savings since it is all for a rainy day.

I personally wouldn't count money set aside for events (e.g. vacations or weddings) as savings - merely funds accumulated towards a goal.

In my mind, savings contribute to your net worth, and will hopefully not be spent away unless absolutely necessary (or unless you are old and gray and retired).