36

I made a financial planning spreadsheet a while back. Then, I realized that the money I'm saving has specific allocations.

This much goes to the future car payment. This much goes to the new PC I'm building. This much goes to something else I'll be buying in the future.

Should I count the money I'm putting into my future car purchase as "saving"? Should I count the money I'm putting into a house downpayment as "saving"?

Or does saving only count for the money I actually save that I don't plan on spending?


This looks like quite a subjective question. But, basically the question is, when does saving count?

This is particularly important for me so that I would know if I need to save more than what I actually am saving currently.

  • 3
    I would encourage you to look at this answer of mine and the blog post that I have linked to. That answers the question of how much you should save and why. – Jay Jan 5 '15 at 4:28
  • 2
    Why should one save money? it can have zero value in bad times. Why not invest in gold, silver or real estate? – BoJack Horseman Jan 5 '15 at 15:42
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    @IbrahimApachi Cash isn't a good investment, but neither are gold and silver (and real estate is questionable). Pieces of companies (stocks) tend to be much more valuable over time. – Brendan Long Jan 5 '15 at 19:41
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    Read the 'Richest Man In Babylon' to understand the philosophy of saving. – Chloe Jan 5 '15 at 23:37
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    The typical rule of thumb for saving is money you are saving towards wealth, investments, retirement, and financial independence. Savings goals for other financial goals (e.g. buying a car), are separate and apart from this 10% guidance. You might consider budgeting into three main buckets, essentials (50%), lifestyle (20-30%), and financial (30-20%) - YMMV – ChuckCottrill Jan 6 '15 at 2:49
44

It doesn't really make sense to worry about the details of "what counts as saving" unless you also move beyond a simplistic rule of thumb like "save 10% of your income".

That said, most of the sources I see pushing rules of thumb like that are talking about saving for retirement. That is, you need to sock that money away so you will be able to spend it after you retire. (This CNN page is one example.) On that theory, it only "counts" if you put it away and don't touch it until you retire, so things like car and computer funds would not count as saving.

Another thing you'll see some people say (e.g., this Nerdwallet article) is to use 20% of your income for "financial priorities". This would include retirement saving, but also things like paying off debt and saving for a down payment on a house.

Saving for a small purchase in the near future would not usually be considered "saving" at all, since you're not going to keep the money. If you put $5 in your wallet tonight so you can buy a hamburger for lunch tomorrow, you wouldn't call that saving; likewise setting aside a few hundred dollars for a new computer wouldn't "count" as saving under most definitions. (Some people might "count" saving for something like a house, since that is a long-term plan and the house, unlike a computer, may rise in value after you buy it. But you wouldn't want to fully count the house as part of your retirement savings unless you're willing to sell it and live off the proceeds.)

However, none of these rules will help that much if your goal is, as you say at the end of your question, to "know if I need to save more than what I actually am saving currently". Saving 10% of your income won't magically ensure that you're saving "enough". To assess whether you personally are saving "enough", you need to actually start running some numbers on how much money you personally will need in retirement. This will depend on any number of factors, including where you live, what sources of retirement income you might have besides savings (e.g., pensions), etc. In short, to know if you're saving enough, you can't listen to the generic stuff that "everyone says"; you need to consider your own situation in a deliberate, focused way.

  • 1
    "paying off debt" seems like a slippery slope. If the debt is credit card debt incurred from frivolous things, then you're actually spending the money on those frivolous things. – Random832 Jan 5 '15 at 14:48
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    @Random832 Once it is debt, clearing that debt is not "spending money on the friolous thing". The money was spent already. Paying off the debt is clearing it off your balance sheet, regardless of where it came from. Barring limited liability & security & tax effects, paying off your house debt or your consumer debt or car debt or investment loans is paying off debt. going into debt for frivolous things was the problem, not paying it off. – Yakk Jan 5 '15 at 15:28
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    @Random832: just make sure you account your credit card spending as spending and that you only consider net debt reduction as "paying off debt", not all money paid to creditors. Then you won't fall into the error of thinking that a budget in which you spend 80% on serious things and 20% on frivolous things, could be improved by switching to one in which you spend 80% on serious things and 20% paying down last month's credit card debt, while running up a new debt of 20% of your monthly income during the month! – Steve Jessop Jan 5 '15 at 17:53
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    I'd quibble that paying off the mortgage on your house is a reasonable form of saving. If you buy a house and get the mortgage paid off by the time you retire, then you will have very little housing expense. (You'll still have to pay property taxes and insurance.) If you don't do this, than when you retire you will be paying rent. If your rent is, say, $1000 a month, then eliminating that expense is just as good as having an additional $1000 per month in retirement income. One can debate the relative value of "investing" in paying off a mortgage versus investing in a retirement fund, but ... – Jay Jan 5 '15 at 20:58
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    For the sake of completeness, worth lauding "saving to buy something," since it's a financial habit that prevents credit card debt. That is, it is as good financial advice and sense as "save 10% of your money," regardless of whether the 10% truism includes it. – djechlin Jan 6 '15 at 2:06
11

It's pretty simple. The 10% is any savings for retirement. Preferably, it's in a retirement account, but that's not mandatory.

It's great that you save for a vacation, computer, house deposit,etc, but that's not what these articles are referencing.

Edit (in response to the running comments on @BrenBarn's answer)

The mortgage issue is worth further discussion. I'm saving toward a home purchase, it may be $50K saved. But that's not money for retirement, the house savings never is. I get the $200K mortgage, my balance sheet is net neutral (less fees, closing costs, of course) but my retirement savings again is unchanged. I put $10K toward principal, the balance sheet again is $10K better, but retirement account, unchanged. Last, I pay off the mortgage. Retirement account unchanged. But, my retirement budget requirement is $1000/mo less (The mortgage payment), and my 'number' drops by $300K or so. (This is based on the 4% rule. To withdraw $1000/mo requires $300K in retirement assets.)

It may seem pedantic, but there's an important distinction to be made here. It's easy to distinguish retirement savings from all other wise financial transactions. Paying debt off is wise but not retirement savings. Any actions that reduce your ongoing expenses? Clearly, wise. And it reduces the number needed to cover your retirement budget, but it's distinct from 'retirement savings.'

For those that enjoy the intellectual exercise of insisting there's always a grey area, I'll give it to you. The family with 3 kids, in the $1.2M 5 bedroom house. The parents know they will move into their paid off summer house upon retiring, and sell this family house. In his wisdom, hubby has planned for the mortgage to be paid in full well ahead of retirement, and for purposes of planning, only view the house as worth $900K. The house does have a relationship to the retirement savings. But the action of planning for Alice's retirement (the maid they will no longer need once they move) is not savings, but rather, an adjustment down in their retirement budget.

I think you'll find most conflicts regarding this issue resolved by understanding this distinction.

2

In addition to the issues discussed in BrenBarn's answer, I think you need to consider your medium term saving needs and existing savings. In particular, do you have a sufficient rainy day fund, a fund you will spend if things go wrong?

For example, if you are dependent on a vehicle that is not covered by a guarantee or service plan, you should have enough money saved for a couple of major repairs. Depending on how secure your job is, whether it carries sick leave and long term disability, and how easy or difficult it would be to find another job in the event e.g. of your employer going bankrupt due to a downturn in your industry, you should have months to years of minimal living expenses in your rainy day fund.

If you don't have those things covered, you should urgently save as much as you can until they are covered. If you do, then the next savings priority is to put money by for retirement.

Of course, if all goes well the rainy day fund will ultimately get folded into retirement, but it needs to exist now, in a form you can access quickly.

1

Your long-term saving targets will include retirement, kids' college, house, etc. Medium-term might be your college, or a car. Short-term might be a vacation somewhere or a new laptop.

In all cases saving, then spending money you do have is better than spending money you don't have.

I think that's the first takeaway of this truism.

However, I also believe 10% is said as a retirement target. Retirement is very important and this advice is stressed by many financial planners because it's very easy to underestimate how expensive it is.

By the same token, it's recommended that you spend 2 months' salary on an engagement ring, and that particular truism can be traced back to a DeBeers ad. I personally don't know whether 10% as a retirement target is sage - it sounds right but I haven't followed it for a variety of reasons. Please corroborate against multiple sources and apply to your own financial person.

0

The reason for the 10% rule of thumb is that this is roughly what you'll need to save for retirement in order to have the same standard of living in retirement as you do during your working years.

Since each additional dollar produces less happiness you will maximize your happiness by equalizing your income over your entire life and thus this produces the maximum happiness.

0

Don't mind the percentages. They are highly misleading.

First, "saving" is making available for future use. It might be "hoarding", "investing" or a combination thereof. It might be for a specific use (a car, a college education, retirement, etc.), or for a non-specific use (for an emergency, for when you decide to spend some of those savings, or just for lack of a compelling use as of the moment).

In first case, whatever you save should be available by the date you intend to use it. In second case, it might be prudent to have savings (and investments, see below) of various liquidity (cash you have at hand, bank account you can draw next day, mutual fund account you can draw in a month, maybe something you can only cash in a year etc.).

You will see that the actual percentages you "save" fluctuate enormously throughout your life, varying with the progress of your career, changes of marital status and family cmposition, etc., etc.

What you should really do is to come up with a rough plan of how you expect, from right now and to the end of your life at whatever age, have enough money for whatever level of comfort you plan for each period of your life, allowing for some specified level of perturbations.

Then you just execute that plan or change it as you go.

-3

This questions is rational but ,in my view, definition of savings will be like this : "Savings is that amount of money which will be useful in unexpected future cash demanding events or they will stay ideal through out your life"

Human can purchase/pursue any luxury items at any point of time in their life but there will come several unavoidable events which will take away your savings and (some how) you will not have any control over it.

Example: You found out you have a cancer at the age of 45. Doctor says you can under go several treatments and will be fine again. For this you will have to spend $1m. Now this can be considered as unavoidable expense and only your savings will be helpful to you in this kind of situations.

So Savings is nothing but a money kept at a safe location which will be used in such unavoidable situations or they will stay ideal during your entire life time and your next generation will be able to use them after your death.

-3

Savings is money set aside (today) for some specific purpose (in the future).

For a more philosophical way to approach this, consider money saved as the opposite of money owed:

  • money owed = your future self must make payments
  • money saved = your future self receives a cash gift from your past self

This philosophy works for things which you may be able to borrow for (computer, car, house), but also for things you can't borrow for (retirement, giving to your kids, etc.).

As others have mentioned, the 10% suggestion is for retirement, but the actual number depends on your lifestyle. As you can see in this chart, saving 10% of your income means you'll need to work for 51.4 years.

  • 2
    The linked site is as awful as an online calculator can be. If today my gross income is \$50K and I save \$5K, I still should have the opportunity to tell the calculator what my actual spending is. The calculator doesn't permit this. It also ignores Social Security, which would give the $50Ker close to $20K/yr. The (hidden) rate of return is set to 5%. Last, when I entered $25K savings from $100K gross, it showed 26% as a percent. Really? That was enough for me to say goodbye. "The actual number depends on your lifestyle" - Yes, indeed. But 10% is a good start. – JoeTaxpayer Jan 6 '15 at 16:22
  • The point of that site is to quickly and plainly show the relationship between savings rate and years to retirement. By all means share your better alternative. – hoosierEE Jan 6 '15 at 18:10
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    There are many online calculators, none I've seen are any worse than this one. The fact is, there are too many variables to keep everyone happy. Saving rate, rate of return, budget after retirement vs budget while working, viability of the Social Security system, etc. – JoeTaxpayer Jan 6 '15 at 19:05
  • You asked for a better calculator Retirement Savings Ratio This spreadsheet lets you adjust every variable. Income, raise %, % saved, rate of return. The target goal isn't in dollars, but a future ratio of your final income. Your retirement budget might be 70% of your current income, and 20% might be replaced by Social Security. 12.5X income will replace that missing 50%. A transparent set of calculations that you can adjust as you wish. Critical comments are welcome, I have a thick skin. – JoeTaxpayer Jan 10 '15 at 13:46
  • ? 1) You have a retirement budget. You had income. When you divide you get a ratio. I don't claim what percent is valid, it can be any ratio you choose. If you believe the exercise of viewing one's retirement spending in light of pre retirement income isn't valid, you are in the minority. 2) It's not an assumption at all. You can extend the sheet to reflect up to age 110 if you wish. I hit my number at 50, and retired at 51. With no social security yet, I needed a 12.5 ratio as our retirement spending is 50% of preretirement gross income. Adjust the sheet as you wish. – JoeTaxpayer Jan 10 '15 at 14:47

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