personal financial plan

Do Your Saving With Purpose

by mike on October 27, 2009

I believe in doing everything in life with a purpose.  I definitely believe doing everything in regards to your money with a purpose.  This is especially true with saving your money.  You know that you should be putting money into savings, but you never use the deposit slips.  Or maybe you do manage to tuck back a little each month, but you don’t really know what you’re saving for.  Usually that money seems to disappear when the next “need” arises.  Allow me to share with you how to save with a purpose.

I am going to share with you four purposes for saving your money.  Before I do that, I’d like to address why we should save.  Proverbs 21:20 tells us the following: “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has”.  I don’t know about you, but I already do plenty of things to be foolish.  So, when it comes to saving, I want to be wise.  The Bible is our guidebook for life and God tells us right there in Proverbs that we should save money.  Now that we have that established, let’s take a look at four ways to save with a purpose.

1.     Save for an emergency.

It is extremely vital for any personal financial plan to be successful that the plan allows for an emergency fund.  The problem for most Americans is that they have no money set aside for a “rainy day”.  So, when the “rainy day” comes (such as a car breakdown or a job layoff), you have no money to fix the problem.  What are you to do in that situation?  What most people do is turn to credit cards.  I have yet to meet with anyone who says “Are plan all along was to run up $50,000 in credit card debt”.  Of course no one does that.  Instead, it results from going from two incomes to one, medical bills, or “must have” renovations to the house.  Sound familiar?  Putting money in a savings account or money market (the purpose here is not an investment) that you can get your hands on immediately is the best way to handle emergencies.  I recommend three to six months worth of normal household expenses in an account specifically designated for emergencies.

2.     Save for a large purchase.

Now I realize this one is really out there.  Let’s say you need a car or a couch or some other purchase that can cost $1,000 or more.  (Warning: keep an open mind)  Save up for that item and buy it when you have the money.  (Gasp!)  First of all, you are guaranteed to only buy something you can afford.  Second, you are much more likely to get a deal if you flash cash in front of the person you are buying from.  Also, when it comes to buying a house, do so only when you have a 20% down payment.  Once again, it is a way to force patience and assure you are getting something you can afford.  Also, you avoid PMI insurance that can cost $100 a month or more.

3.     Save for non-monthly items.

I have touched on this in a previous article, but it is extremely important.  As part of your monthly budget, set aside in a savings account for non-monthly expenses.  This includes Christmas, a 6 month insurance premium, or real estate taxes.  When the bill comes due, you just switch the money you have saved in your savings account to your checking and pay the bill.  How sweet it is to have the money already there when these large, non-monthly bills come due!

4.     Save for retirement and college (long-term savings).

The final purpose of saving money is for long term needs.  This form of savings is typically referred to as investing.  It is not for something that you need in the next three to five years.  I won’t get into the specifics of how to do this for the purpose of this article (I will touch on that in a future one), I will just emphasize how important it is to save for these items.  Retirement is coming, and I don’t know about you, but I’m not relying on the wonderfully efficient, well-run social security program.  Once you’re debt is paid off and you have your fully funded emergency fund in place, I recommend saving 15% of your income for retirement.  If you are doing all these things, then you can also save for your kid’s college.  I will say, however, that saving for your kids’ college is not a must.  There is no reason to feel guilty about not paying for your kids’ college.  There are many ways for someone to go to college without debt.  Scholarships are a big way, so start talking to your future college student about this now so they keep those grades up.  Another way is for your junior to work their way through college.  These two things alone will cover the expenses for a two year junior college, then two years at an in-state school.  If you have plans for private school or graduate school, then it is a good idea to save for your kids’ college AFTER you have no debt, an emergency fund, and are saving 15% towards retirement.

Imagine this with me for a minute: You have $10,000 in the bank for emergencies, just paid cash for a 2 to 4 year old car, have money already set aside for Christmas and real estate taxes when they come, and are saving for retirement.  Now that’s what I call financial peace.  Imagine how this peace would bring unity and harmony into your marriage as well.  Remember, someone who knows much more about what is good for us than we do has told us:

“In the house of the wise are stores of choice food and oil, but a foolish man devours all he has” – Proverbs 21:20.

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