Friday, July 6, 2012

Savings versus savings

You can't have Savings without savings.  Huh?

I received two inquiries recently, that I think have the same answer.

First, a young person wanted to know how to go about starting to invest.

Second, another person was asking, if they gave up credit cards, how they could feel "secure" if an emergency came.

The answer is the same - saving money so you have Savings.

The word "Saving" is confusing.  It has at least three meanings (English is a hard language to learn!).

First, when we go shopping, you see signs that say "Sale, 50% Off!  Great SAVINGS!"   But of course, you are not really "Saving" anything, you are SPENDING, and the price discount is just a price adjustment to market value.   Remember that:  Nothing is sold in the marketplace for less than market value. By definition, when an item is sold in the market, its price IS market value.  But the point is, stores use (or misuse) the term "Saving" in the context of price reductions.  It is one definition of the word, but a poor definition.

There are two other definitions or usages of the term "SAVING" as well.   We talk about "Saving" money in a Savings Account at the bank.  This usage of the term is fairly straightforward - Savings are money that is retained - the difference between your income and your expenditures.   Most Americans have no Savings - or very little.  And that is sad.  And they have no Savings for a reason, as we shall see.

There is a third definition as well - cutting budget expenses from your life.   If you get rid of Cable Television, you are "saving" $100 - in a very real sense.   Unlike the grocery store, which screams at you that you are "saving" 50 cents on a jar of pickles, when you cut out expenses entirely, you are really making a "savings" in your life.

And with that "savings" you can put money into "Savings".   And in fact, in order to have "Savings" you must first create "savings".   Oh, but this gets confusing!

Perhaps we should distinguish the two, as we did with millionaire versus Millionaire - by capitalizing one.

So, let's call "Savings" with a big-S, the money you have in the bank, in your Savings Account.

And let's call "savings" with a small-s, the money you cut from your budget.

Now it is a little clearer when I say that in order to have Savings, you must create savings!

In a way, it is like the Federal Budget (or the way it should be).  If you cut taxes a dollar, you have to cut expenditures by a dollar.  The Republicans failed to do this, for eight years.  The Democrats, of course, have hardly done any better.  Both are to blame for not finding savings to create Savings.

In other words, if you want to start to accumulate money you need to spend less than you earn.  This is the big problem - the big nut to crack - for most people.  Most of us start out spending every dime we make, and thus have no Savings.
We then try to save up some money in our Savings Account, only to find out at the end of the month that we have bills to pay.  So we cash in our Savings - or worse yet, rack up debt - and end up nullifying our efforts.

The easiest way to Save (big-S) is to save (small-s).   In other words, if you want to Save up $100 in your Savings Account, you must first find a $100 savings in your budget.

It is as simple as that.   Unless you have savings, there will be no Savings.   And I know this firsthand, and also because I have seen others do it.   Joe Paycheck decides he is tired of being broke all the time and wants to have "money in the bank" - so he decides to get a Certificate of Deposit and plunks down $1000 at his local bank.

Problem is, there is nowhere in his budget where that $1000 could have come from.   His pattern of spending is that he spends every penny he makes.  Without first finding $1000 in spending cuts, he will be out of money before the end of the month.

And he is.  So he puts more and more expenses on his Credit Card, until that starts a running balance, and he ends up deeper and deeper in debt.

And you see this with 401(k) plans.   Joe Paycheck decides he's going to Save up a lot!  He opts for a full 15% deduction from his paycheck!   A great sentiment, but first you have to find the savings to put into Savings.   That first paycheck rolls around, and Joe is short of cash - so he puts his lunch on a credit card (instead of brown-bagging it) and debt accumulates.

Find the savings first, then put the money into Savings.   Pretty simple concept - but it eludes most of us.

I know that as a younger man, I would sign up for a Savings plan, and not think about where the money would come from in my life.  I though I would just "adjust" somehow, and spend less, without making any real concrete plans.   You can guess how that worked out - Badly.

Now some folks take the wrong lesson away from this - they assume they "can't afford to Save" merely because they refuse to save.   And you see this, as the gas station, when Thelma roars up to the pump in her clapped-out Saturn, runs into the store, uses a $3 ATM machine to get $20 cash, buys cigarettes, a soda-pop, chips, and a lottery ticket, and then pumps $5 in gas into her old heap.  If you asked her, she is "living paycheck to paycheck" and "can't afford to save!"

But cutting out ATM fees alone would make a hefty pile of savings she could put into Savings.

And that was the point of my "Can You Really Afford It?" posting.   We think we can spend up to our income, but unless we are funding our Savings, we really can't.

Finding savings to create Savings, however, can be a fun game to play.  Give up your daily Starbucks habit and put $5 a day into a jar.  At the end of the month, put that $150 into your Savings account or your 401(k).   Cut the Cable TV and set up an auto-pay in your checking account to put the same dollar amount as your cable bill into a Savings or investment account.   You won't miss the money, because your net cash-flow will be the same and you won't be hurting for money, because you have budgeted for Savings by making savings in your budget.

And so on, and so on.   Having Savings requires sacrifice - making savings.   But doing one can be rewarded with the other.

If you just try to "Save" without making corresponding cuts in spending your Savings plans will be derailed in short order.  If you have tried to Save in the past - without saving first - you probably had that frustration - "why is it so had to Save?" we say.  But you can't Save money, without cutting spending first - by the same amount - to create a savings in your budget.

So, if you want to start Saving - start saving.   Does that make any sense?