Saving is an important component of personal finance and reaching financial freedom. Saving must exist within the family budget in order for a family to prepare for the future. Certainly, most families have savers and spenders, but the right balance must be found between the two. Too much emphasis on saving can cause money to be the primary focus in our lives. And just the opposite; too much spending can cause money to be the primary focus. Both are dangerous areas because they can place money before loved ones and God.
Why you should save
When I think about saving there are a couple of Biblical scriptures that come to mind. First, Proverbs 21:20 tells us: “the wise man saves for the future, but the foolish man spends whatever he gets.” I don’t think this scripture tells us we shouldn’t spend, but it does plainly tell us that we shouldn’t spend all of our money without preparing for the future. As mentioned, it’s important to find the right balance and make sure savings is a permanent category in the monthly budget.
Also, Proverbs 30:24-25 (NIV) tells us: “Four things on earth are small, yet they are extremely wise: ants are creatures of little strength, yet they store up their food in the summer.” We all know that ants store up their food for future use. This example illustrates that saving is wise and it protects us in the future.
Types of saving
There are two basic types of savings. Short-terms savings, which I discuss in this post, are savings in which we’ll need in the near future. This type of savings includes an emergency fund, savings for replacement of items such as automobiles and appliances and entertainment items such as the family vacation (ideally saved after more important areas are covered). Most financial gurus recommend saving 3-6 months of short-terms savings in case of job loss or for an unplanned expense such as medical or automobiles.
Long term savings includes a couple of different areas. First, long-terms savings is investing money for the latter years in life, commonly referred to as retirement. This savings includes investing money in your company 401k, IRA or other retirement account.
The other type of long-terms savings is investing to build wealth. At a future point along the financial freedom journey, once we are saving for retirement and children’s education, we can further invest to build wealth. This may include investing in mutual funds, company stock, real estate, etc.
When should you save?
There is an opportunity to begin saving immediately. In fact, both Dave Ramsey and Crown Financial Ministries recommend saving $1000 in short-terms savings to begin an emergency fund before paying off debt. Many people immediately think they should focus on paying off debt, but in reality, emergency savings is important to have because when an unexpected emergency occurs, it could drive you deeper into debt if you don’t have the money to cover the expense.
I think what is often not as clear is when you should begin saving for replacement items such as automobiles and appliances. Both of these things can be considered major expenses and without adequate savings we may fall into the temptation of using credit or a loan to purchase them.
I think the Crown Money Map provides a clear plan for when to start this type of short-terms savings. Once all consumer debt is paid off and one month’s living expenses have been placed into an emergency savings account, it is appropriate to start saving for such items.
Giving before savings – an important message
Before we go further, an often area considered after savings is giving. Giving for a Christian should be the first step on the plan to financial freedom. If we are saving before giving, our focus is on fulfilling our purpose for money rather than God’s purpose.
How much should you save?
If you look at the percentage guides from Crown Financial Ministries, you’ll see that short-terms savings should be around 5% of your monthly budget. Yes, I mentioned short-term savings because investing, or long-term savings is a separate budget category.
I think this percentage may be more if you’re in the early phases of your journey because you will be trying to build your emergency savings as quickly as possible.
Then, much of this short-terms savings could be used for investing, or long-term savings. Note: a short-terms savings category in the budget will always need to remain because you will continue to save for replacement items and eventually entertainment such as a family vacation.
Tips for saving
It’s a good idea to set up an automatic deposit into a savings account so that savings is automatically deducted from your paycheck or transferred from your checking account each time you’re paid. You can typically work with your HR department to split your paycheck for deposit into multiple accounts.
Ideally, short-terms savings should never be considered for anything outside of its designated purpose in the monthly budget. Otherwise, there is temptation to use the money. And believe me, you can always find a need for it. The automatic deposit into the savings account helps avoid this temptation.
Try to get the short-terms savings into an account that isn’t easily accessible. For example, you may want to choose a savings account at different institution than your regular checking account.
Internet high yield savings accounts such as ING Direct, Ally Bank, WTDirect or HSBC Direct are all good options to consider. They each require a few business days to transfer money to a checking account with another financial institution. This is a decent barrier to keep you from easily digging into savings and spending it during the month.
How have you been successful in planning for the future with short-term savings?
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