HOW I DO MONEY: SAVINGS VS SPENDINGS
October 21, 2015
This is the first in a new series I'm calling How I Do Money. I'm going to talk about how I handle my own finances, for better or for worse, and figure that you can decide what parts of it might fit into your own finance journey. The way I manage money isn't for everyone! And it's not perfect. But I learned by reading about how other people organized their finances, and I hope this will be useful.
I’ve talked before about how I’m not a natural-born saver. Money used to burn a hole in my pocket. But in 2013 I was given my first big reason to try to save up a pile of money in a short time: I got engaged.
Fun story: in the first weeks after the engagement, I figured that a wedding wouldn’t cost more than five or six thousand dollars. I mean, right? How much could it cost to feed 150 people and make everything beautiful and perfect? Ha. Ha ha ha ha. Ha.
When my then-fiance and I realized that we would need closer to $15,000 to put on the wedding we were envisioning, we went into high-powered savings mode. I took on a side job as a waitress and hostess at my uncle’s restaurant. We ate the cheapest food, banned all shopping, cut our own hair, went nowhere and worked our butts off. Towards the end we were saving over a $1,000 a month into the wedding account.*
Then a few months before the wedding, it hit me: none of this money was really ours. It belonged to the reception hall, the church, the shoe store, the jewelry shop. I was just building it up until it was time to give it to its real owners.
It wasn’t savings. It was spendings.
Savings is money you put aside for an unspecified future. Spendings is money you put aside for a short-term goal.
Now, spendings have their place in a picture of financial health. It’s certainly much better to put aside money every month for a large purchase than to make the purchase on credit. But there’s a big difference between saving up money to buy a car or fund a vacation, and putting aside money with no plans to touch it. Psychologically it’s different, and financially it’s different.
Savings is something you do to get rich. You invest your money. You create security. You call it an emergency fund or a retirement fund or a fuck-you fund. It’s money that gives you options. Money that says “Sure, you can start a business,” or “Sure, you can be a stay at home parent,” or “Sure, you can buy a house and take on the risk of any repairs it needs.” It’s money that buffers you from the winds of change.
Spendings is something you do to not get poorer. You think, crap, my rusty car is maybe gonna last another year before it needs another major repair. Either that repair is going to cost a couple grand, or it will be so bad that I’ll need to junk it and make a down payment on a new car. So I need to have $2,000 on hand twelve months from now. Better start putting away $166 bucks in my savings account every month. That way I can either pay for the repair in cash, or make a sizeable down payment, rather than paying with a credit card or taking on a huge car loan.
When I made this realization back in 2013, the first thing I did was open a new savings account at my bank and asked them to name it “Car Fund.” I deposited $100. It’s all I had to spare. Next month, I added another $100. Rinse and repeat.
(Here’s an interesting artifact for you: a month before the wedding I submitted a letter to one of my favorite finance sites, The Billfold, talking about this exact topic. I didn’t start Networthy until a year later, but you can see exactly where my brain was heading. My letter is the second one.)
In August of 2014 -- literally the same month as the wedding -- my rusty old pickup truck refused to pass inspection. It needed about $1,000 of repairs. And guess who had put $100 a month into a savings account for ten months straight? I paid for the repair the same month as the wedding, without debt, and without having to touch the wedding fund.
Seriously. Think about how powerful that makes you feel. How secure.
How this works in practice
I am currently addicted to creating and naming my sub-savings accounts like this. Here’s a short list of funds I’ve built for myself.
New Car Fund - $150 a month for 14 months until we could make a $2,000 down payment on a new car to replace the truck, which continued to need thousands of dollars of repairs every year. Not currently contributing as we now have two cars in great shape.
Kerosene Fund - $40 a month all year round, then in the summer we buy $500 worth of kerosene for the apartment heater.
Insurance Fund - $80 a month so that we can pay our car and renter’s insurance in one payment every six months. This makes the total cost significantly cheaper than using the insurance’s monthly payment plan. They charge extra for that shit! It’s sneaky!
Travel Fund - $350 a month right now until I can afford to pay for flights to my friend’s wedding in Dubai next year!
Then our savings goes into a savings account which is currently receiving $250 a month. We also contribute to our retirement accounts. This is money we never touch. Money that I don’t have to worry will get drained by any of the expenses listed above. Money for some unspecified future life.
I tell you, it’s a lot easier to find $40 this month than it is to find $500 all at once to buy kerosene once a year. And while it can be tough to find $350 for the travel fund, it’s a hell of a lot easier to do than to come up with $2,600 for the flights. It’s all about chipping away, chipping away. And after major events pass, like buying the car, or taking the trip to Dubai, I can find new uses for that money. Maybe after Dubai, I’ll only contribute $100 to the travel fund, and put the other $250 towards a new house fund, or maybe I’ll up my emergency fund savings to $500 a month.
Do you separate your savings and spendings? How do you plan for short term and long term goals? Let me know in the comments.
*(I do need to mention that my husband and I did receive amazing support from friends and family. My mother bought my dress and the flowers, my father bought the groom’s suit and also called in a favor to borrow a friend’s Bentley and drive us around for the day, my in-laws hosted the rehearsal dinner, we got our engagement photos for free from a photographer friend, another friend donated speakers and a sound board and DJ’d, another family friend did my hair, and yet another donated the desserts. We also received generous gifts to our honeymoon fund. So all in all we spent about $15,000 on what felt more like a $25,000 wedding. Thanks fam.)