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 Post subject: Young saver-why save, and when is it okay to spend savings?
PostPosted: Sun Sep 14, 2008 4:13 pm 

Joined: Sun Sep 14, 2008 2:12 pm
Posts: 23
I've only been out of college for two years, and I'm trying to save responsibly. Things are going quite well - I have $9000 between savings and liquid investments and no debt, and I contribute more to my 401k than my employer matches. I put 10% of my gross paycheck into savings, and I keep track of where I “should be” if I never touched my savings. So far, it’s worked fine - I’m right at my goal of keeping 10%.

But since I’m about to hit my goal of a $10,000 emergencies-only fund, I’m unsure of how to direct my savings. I want to start saving for fun things, but I don’t want to get sloppy. I’m used to having this increasing target of 10% savings which cannot be touched except for emergencies, and I’m not sure how to organize my savings in the future, especially regarding saving money so I can spend it on fun things later on.

For instance: I’d like to take a trip with my girlfriend somewhere tropical. Once I hit my $10,000 goal, would it be okay to start taking some money from that 10% of every paycheck and putting it into a fund for a trip? Or is that not really the point of savings? Part of me feels that as long as I keep adding money to my emergency fund, I can start to put some of my saving money towards fun activities. Another part of me feels that saving up for a trip isn’t really “savings” - it’s actually an expense because I know I’ll spend most/all of it in the future, and I shouldn’t take money out of the “savings” bucket for a “saving so I can spend it all later” bucket.

The obvious answer is to keep stashing away 10% every month, and get the trip money from the rest of my budget. But I’m already squeezing myself a bit to save that 10%, and it would be quite a squeeze to adjust my budget even more. So trying to save for the trip would be very difficult without diverting some income away from my general savings fund. I guess part of the question in: at what point am I being too hard on myself and being miserly with myself (and those around me)?

I realize that opinions will differ, and different methods of saving work for different people. That’s why I’m here: to find out how others view savings, and what is truly “saving.” Is saving money that you know you’ll spend truly saving? Is it only saving if you’re going to keep it around for investments, like buying a house or paying for educational expenses?


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PostPosted: Sun Sep 14, 2008 4:56 pm 
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Joined: Thu Jun 05, 2008 9:46 am
Posts: 176
The point of savings is to pay for things you can't handle out of your cash flow. So we save for retirement because at some point we'll stop working and won't have the cash flow otherwise to fund our lifestyles. We save for a down payment for a home because (most of us) can't write a check for $50,000 at closing out of our regular monthly paychecks.

So, absolutely, if you want to take a trip, that is a great thing to save for. Other big-ticket items you might save for: a car, a wedding, an education, dental work...

IMO, a nice simple way to look at savings is to think about "now" and think about "later." "Later" would be retirement. Once you are saving enough to get you where you want to be at retirement, everything else is available to 1) spend now or 2) set aside for shorter-term savings goals such as the ones I mention above.


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PostPosted: Sun Sep 14, 2008 5:06 pm 

Joined: Tue Aug 05, 2008 3:22 pm
Posts: 548
Location: Northern CA
If I were in your shoes, I'd be thinking more about the Time Value of money for your retirement.

Typical targets for people just starting out are threefold:

1) Emergency fund, 3-6 months of expenses (presumably this is your $10K).
2) Retirement savings. You say you're "contributing more than the match", but you're NOT MAXING it out. I think this is a mistake.
3) Downpayment for a house, other "to be spent" goals...

So, once I hit the $10K for number one, I'd re-route the savings into your 401(k), and max it out. Let's say that's another 5% of your salary.

*Then* you divert the remainder of the 10% you had been saving for the Emergency Fund into your Trip and/or Downpayment account.

Good luck - it sounds like you're doing well.

Sandi


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PostPosted: Sun Sep 14, 2008 6:00 pm 

Joined: Sun Sep 14, 2008 2:12 pm
Posts: 23
Thanks for the response, Sandi. I'd like to hear your take on the "where does the money for fun come from" question as well - sure, I can max out my 401k and start saving for a house downpayment, but if that would leave me with no money to save for my little vacation idea, am I really achieving appropriate savings goals?

Also, I'd like to clarify something:
sandi_k wrote:
3) Downpayment for a house, other "to be spent" goals...


I don't consider saving for a house or a car to be the same as putting aside money "to be spent later." A house and a car are necessities (in my mind), and the house is also an investment, albeit a long-term one. I consider those to be appropriate goals for my "savings" bucket. My confusion is whether putting aside money so I can spend it all on a vacation is truely "saving."

Hope to hear more from you!


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PostPosted: Sun Sep 14, 2008 6:16 pm 

Joined: Sun Sep 14, 2008 2:12 pm
Posts: 23
Greenewashed wrote:
The point of savings is to pay for things you can't handle out of your cash flow.


It's amazing how seemingly obvious statements can really frame a discussion - thanks for this, it puts things in perspective.

Greenewashed wrote:
So, absolutely, if you want to take a trip, that is a great thing to save for.


Let me clarify my question, because I know my first post was extremely long. I'm currently on what I consider to be a good, responsible saving schedule - 10% of my gross income every month, plus 8% to my 401k. Now I would like to take some of that 10%, and put it into a "vacation" pool that will be spent.

So my question is: if some of my "savings" was actually going to my vacation fund, do you think it's a reasonable use of my savings, or would you say I'm fooling myself if I call the "vacation" fund "savings?"


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PostPosted: Sun Sep 14, 2008 7:04 pm 

Joined: Sun Feb 17, 2008 4:39 am
Posts: 322
Location: Woodstock, CT
I don't quite understanding what you mean by fooling yourself by calling "vacation" fund "savings". so here is more confusion
So I'll give you my own interpretation of what Greenewashed said:
you'd save to pay for a vacation because a trip is not likely to be funded by your next paycheck or at least not the vacation and your rent out the same paycheck.

so no you're not fooling yourself, just switch the labels

life is not about savings, save as much as you can, but live your life.

you're about to hit your goal of $10k for Emergency Fund, once that is achieved stop contributing to that fund.
now create a Vacation Fund with a specified amount to which you'll divert the 10% to, until that amount is reached.
you have a system i.e. the 10% out of your gross pay in savings, it's working for you keep using it for different goals
if you want to max out your 401k or beef up you EF or you want to buy a $400 putter (does that exist?) you know 10% of your next paycheck can go towards that goal

_________________
When you're good to others, you're best to yourself - B. Franklin


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PostPosted: Sun Sep 14, 2008 7:05 pm 

Joined: Sun Aug 03, 2008 1:03 pm
Posts: 435
Location: Oklahoma
With your EF in place and 8% going into 401k, using the 10% to save for vacation is fine. Keep in mind your short term needs such as car, downpayment for house etc. Only you know when your vacation is and how much you will need. Your doing great, have fun.


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PostPosted: Sun Sep 14, 2008 7:13 pm 
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Joined: Thu Jun 05, 2008 9:46 am
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Tehhund wrote:
Let me clarify my question, because I know my first post was extremely long. I'm currently on what I consider to be a good, responsible saving schedule - 10% of my gross income every month, plus 8% to my 401k. Now I would like to take some of that 10%, and put it into a "vacation" pool that will be spent.

So my question is: if some of my "savings" was actually going to my vacation fund, do you think it's a reasonable use of my savings, or would you say I'm fooling myself if I call the "vacation" fund "savings?"


Short answer, no, you are not fooling yourself. Unless your big goal in life is to leave a bunch of money to your heirs when you die, everything you are calling "savings" is destined to be spent at some point in your life.

IMO, you are looking at savings all backwards. You should have the goal first, and set the savings target second. Otherwise, the 10% and 8% savings targets you have set are basically arbitrary. Also, as you're finding out, you get confused about what you're saving for and start to feel guilty about spending from your savings funds.

Once you know what big goals you want to save for (let's say retirement, house down payment, trip), you should assign estimated dollar amounts and timelines for each (retire with $2MM in 30 years, save $50,000 in 10 years, save $5,000 in 1 year) and work backwards from there to determine how much you need to set aside each month in each category. Then you can execute each plan without anxiety.

Also want to add I agree wholeheartedly with everything DebtFreeCrusader said, esp. "live your life."

Also want to add that you are off to a really great start with five figures in an e-fund at such a young age.


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PostPosted: Sun Sep 14, 2008 8:05 pm 

Joined: Sun Sep 14, 2008 2:12 pm
Posts: 23
Thanks to everyone for the replies - this has given me some perspective. I had a vague feeling that I should be more deliberate in my saving rather than defaulting to my 10%/8% mix, and since you guys agree I'll take some time to figure out my goals and how I'll get there. Right now, any savings above my emergency fund would be a vague "future car/house" fund - which sounds like a recipe for disaster in the form of lost focus.

I like the ING Direct multiple accounts idea - that would really help me focus and track my progress. . Anyone know if this is possible with an Etrade savings account?


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PostPosted: Sun Sep 14, 2008 11:22 pm 

Joined: Sun Aug 03, 2008 7:24 pm
Posts: 104
Location: Texas
Maybe you should quit referring to the 10K you have as 'savings' and call it your EF (emergency fund). DO NOT touch your EF for anything short of an actual legitimate emergency. Start either another account or keep a seperate record for saving for your vacation.


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PostPosted: Mon Sep 15, 2008 8:30 am 

Joined: Fri Aug 31, 2007 7:48 am
Posts: 286
Yeah, I'm kind of confused. Is your 9k in savings/liquid investments your emergency fund or your savings?

Yes, it is easy to setup multiple savings accounts with ETrade. I have one for my EFund and one for other stuff.

Also, where did you come up with 10% of your gross income as a savings goal? While it's nice to have a goal, I'm not sure where you get 10% as an arbitrary percentage to save. My method of saving was the reverse: figure out how much my fixed expenses were, figure out how much I'd spend on lifestyle, and whatever was left was my savings. If you do that and your savings are less than 10% of your income, then I guess you can keep your 10% goal. For me, it was more like 40-50%.


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PostPosted: Mon Sep 15, 2008 2:14 pm 

Joined: Tue Feb 12, 2008 12:15 pm
Posts: 99
I've been using the 10% savings (after retirement savings) as a minimum goal forever.
For years and years I didn't have a decent salary so I set the 10% up when I was 12 and doing odd jobs.

I do the subaccts and recommend it for your goals OP.
Even if I dont have a vaca in the v. near future planned, I know I will want to do it eventually.
Same as with regular saving allotments for a replacement car, dental work etc.

It sounds like you have the right idea. You can still keep 10% as the goal (since your budget can't handle more) and slice up per acct by % or by dollar amount.

As time goes on you will realize there are a whole bunch of buckets you want to fill for the inevitable.


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PostPosted: Mon Sep 15, 2008 3:00 pm 

Joined: Tue Aug 05, 2008 3:22 pm
Posts: 548
Location: Northern CA
Tehhund wrote:
Thanks for the response, Sandi. I'd like to hear your take on the "where does the money for fun come from" question as well - sure, I can max out my 401k and start saving for a house downpayment, but if that would leave me with no money to save for my little vacation idea, am I really achieving appropriate savings goals?


OK, that is useful. Without some numbers, it's easy to get lost in the ether. For the record, I think you should be saving a MINIMUM of 10% for retirement. As mentioned, the time value of those savings can never be regained. So *I'd* have $10K for your emergency fund, 10% of gross pay into retirement, and the remaining 8% divvied up for house/car/vacation goals.

Tehhund wrote:
Also, I'd like to clarify something:
sandi_k wrote:
3) Downpayment for a house, other "to be spent" goals...


I don't consider saving for a house or a car to be the same as putting aside money "to be spent later." A house and a car are necessities (in my mind), and the house is also an investment, albeit a long-term one. I consider those to be appropriate goals for my "savings" bucket. My confusion is whether putting aside money so I can spend it all on a vacation is truely "saving."

Hope to hear more from you!


Ah, but a lot of those expenses are predictable, and can be planned. I DO consider "vacation funds" to be savings, until they're spent. Because if the car blows up, I may have to delay my vacation.

One way I've kept it separate in my mind is to use an old-fashioned accounting ledger book to "track" my savings account. Whenever I make either a deposit OR a withdrawal, I account for it across my multitude of "savings goals." Believe me, that really brings home the power of "choice" - in an immediate way.

Example:
I have savings goals of vacation fund, house repairs, gifts for family over the course of the year, car repairs, and vet bills. I look at past spending patterns, and assign a dollar value to each as a goal:

Vacation Fund: $2000 annually ($167 per month)
House Repairs: $5000 ($417 per month)
Gifts: $2000 ($167 per month)
Car repairs and maintenance: $1500 ($125 per month)
Vet bills: $1000 ($83 per month)

Total for savings: $959 per month

I "deposit" each monthly allocation to each goal in the ledger. And if I decide to withdraw from the fund, I have to see WHICH GOALS I'm willing to delay to get use the money NOW. It helps train me in making conscious choices about spending. If I just had a random pile of cash in an account, with no reminder of the costs I know to be coming down the line...it's easy to feel flush, and fritter it away.

I understand that house funds may seem like a "separate" account and goal, and you can certainly set aside a special savings account for it. For me, it's easier to just have one big account, as LONG AS I know which goal has the allocated funds.

Hope that helps...

Sandi


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PostPosted: Tue Sep 16, 2008 2:09 am 

Joined: Mon Sep 15, 2008 8:18 am
Posts: 10
Location: California
I think at your age it is most important to get yourself good health insurance and get involved in a good retirement scheme. I'm always saying it but as you get older the prospect of what happens when there is no wages coming in every week gets scary. When you are starting out it seems like a long way away but you'll be surprised :). So start building for your future with long term saving and a retirement fund.

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The brain is a wonderful organ. It starts working the moment you get up in the morning and does not stop until you get into the office - Robert Frost


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PostPosted: Tue Sep 16, 2008 7:48 am 

Joined: Sun Jun 10, 2007 3:19 pm
Posts: 620
Greenewashed wrote:
IMO, you are looking at savings all backwards. You should have the goal first, and set the savings target second. Otherwise, the 10% and 8% savings targets you have set are basically arbitrary. Also, as you're finding out, you get confused about what you're saving for and start to feel guilty about spending from your savings funds.


I think it's ok to start saving first, then figure out your goals. But you're right that you need to figure out goals.

Arbitrary savings is better than none.


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