Save With a Purpose.

Most people understand what a “budget” is. While accountants might use the term a bit differently, in personal finance like I teach, it’s simply a spending plan for your income.

Now, a lot of people struggle with translating that into practical action to improve their financial situation by actually creating and living on a budget. But generally they at least see the reason for it:

Planning your spending prevents overspending.

But you’d be surprised at how many people don’t apply that same principle to their saving. I don’t mean that they don’t save...many if not all are doing a budget of some sort and if they’re out of debt, they’re directing money towards saving.

The trouble is that I often find that people don’t know WHY they’re saving. When that happens, they end up OVERSAVING.

Yes, just as having a spending plan prevents overspending, planning your saving prevents oversaving.

  • I know of a couple who had so much money saved up that (once I pointed it out) they were able to pay off their two rental properties in one fell swoop, just by thinking about the purpose for their savings, and calculating what they actually needed for specific purposes.

  • I know of another couple who had an extra $20,000, (beyond their emergency fund and home improvement fund) just sitting there with no designated purpose, that they could put on their mortgage when they refinanced, thereby reducing both their balance and their interest rate.

You need a spending plan, but you also need a saving plan.

There’s no such thing as saving without a purpose in mind. Well, at least there shouldn’t be.

So what are the possible purposes of saving?

1. First and foremost, for an emergency fund. The purpose of an emergency fund is to keep you from going into debt, when...

  • The emergency is a large, unexpected, and necessary a major car repair, a family funeral in a distant city, or a new furnace in the dead of winter.

  • The emergency is a loss of income, due to job loss, or maybe loss of a tenant in a rental property.

(If you have debt other than your home mortgage, then limit your saving to a $1000 baby emergency fund for now, and focus intensely on getting out of debt. See my website for more information on that if you need it.)

2. Second, a sinking fund. This is the one thing that every client of mine remarks on that made a huge difference in their finances.

A sinking fund is where you save on a regular monthly basis for those big bills that you can somewhat predict as to timing and amount, that would otherwise totally crash your budget if you didn’t have the money saved up.

Things like

  • vacations,

  • advanced degrees,

  • tires for your car,

  • big insurance or tax bills,

  • Christmas shopping