{"id":166859,"date":"2013-11-21T04:00:38","date_gmt":"2013-11-21T11:00:38","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=166859"},"modified":"2023-10-04T12:39:40","modified_gmt":"2023-10-04T18:39:40","slug":"what-are-savings-for","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/what-are-savings-for\/","title":{"rendered":"What are savings for?"},"content":{"rendered":"
Last week, I wrote about a conversation with my investment adviser. In the article, I mentioned that my current income roughly covers my current spending except<\/em> that I’ve been spending an average of $2,000 per month on travel. Because of that spending deficit, I’ve been drawing down my medium-term savings, which should last me until the end of 2014. Meanwhile, I’m exploring a variety of options to bring the income and spending into equilibrium.<\/p>\n Some GRS readers were taken aback by this.<\/p>\n “Maybe the name of this blog should be changed to Get Poor Quickly,” Marsha wrote. Brian from Debt Discipline<\/a> expressed the common concern that withdrawing from my investments seems like a step in the wrong direction. And Greg wrote that this blog must be losing its way if I’m writing about “stealing from the future to maintain a current lifestyle of travel.”<\/p>\n Other readers, however, took a different view.<\/p>\n Frugal Scholar<\/a> noted that there’s nothing wrong with taking withdrawals if my total savings can support them. The always-perceptive Sam<\/a> wrote, “If J.D. is living a life of semi-retirement, which it seems to me he is, then it would make sense to pull money from investments as that is what one does in retirement.” And EMH was even more direct: “Why have all those investments and not use them?”<\/p>\n I spent a lot of time replying to comments on last week’s article. In doing so, I noticed that I’d done a poor job of sharing all the facts about my situation. I’ve been timid about total transparency, which means readers don’t have all the info they need to make a judgment. Today, I want to change that.<\/p>\n It also occurred to me that there are differing opinions about what savings are for. On some levels, those differing opinions are a result of each of us having different plans and priorities. But I think something that gets missed is that money is used differently at different stages of life.<\/p>\n In February 2009, I wrote a meditative article about the stages of personal finance<\/a>. This then led to a series of articles on the subject. Here’s how I defined them:<\/p>\n When I started this blog, I had just progressed from the zeroeth stage of personal finance to the first. Over the next few years, I documented my progress as I achieved greater knowledge and control of my money. Today, I am fortunate to be in that final stage of personal finance. I am financially independent.<\/p>\n What do I mean by financially independent?<\/p>\n Some people believe you’ve achieved financial independence only when you can live off the dividends or interest your savings produce. Others — including me — take the stance that you’re financially independent if, given reasonable assumptions (4 percent inflation, 6.5 percent long-term real return on stocks, 4 percent withdrawal rate, etc.) you’ll also draw down your principal.<\/p>\n As I shared in the comments last week, I could stop working today and live off my savings for the rest of my life. In essence, I could choose to retire early — if I wanted. But I don’t<\/em> want to, and for several reasons:<\/p>\n When people choose to continue working even though they could call it quits, they’re said to be semi-retired<\/a>. I think that’s an apt term, and that’s how I classify my current state. I am semi-retired.<\/p>\n Saving is a key part of personal finance. In fact, I’ve come to believe it’s the key<\/em> part of personal finance. When we save money, we build smart habits today while protecting and providing for our future.<\/p>\n That said, saving plays different roles in different stages of personal finance.<\/p>\n For instance, when you’re accumulating or repaying debt, saving ought not be a high priority. Aside from a minimal emergency fund (of $500 or $1,000), your money is better directed elsewhere. That’s why in my beloved Balanced Money Formula<\/a> — which urges folks to spend less than 50 percent of after-tax income on Needs, more than 20 percent on Saving, and the rest on Wants — debt repayment is actually classified as saving. There are few uses for money that provide a better return than paying down credit cards and other high-interest loans.<\/p>\n Once debt is eliminated, however, saving becomes a high priority. During the second and third stages of personal finance, we work to build three types of saving:<\/p>\n We save money for two purposes: To protect against an uncertain future and to help us fulfill our dreams.<\/p>\n Short-term savings and long-term savings are generally defensive. They’re a form of self-insurance to shield us from the slings and arrows of outrageous fortune. Medium-term savings is used more for offense; it’s to pursue the things that provide us pleasure and purpose.<\/p>\n There seems to be a subset of people, however, for whom it’s never acceptable to spend savings. We’re all familiar with folks who spend too much and never save, but there are also people who save too much and never spend. They’re mocked in books like A Christmas Carol<\/em> and Silas Marner<\/em>. They’re demonized in movies like It’s a Wonderful Life<\/em>. But for some reason, in real life, these types are often considered heroes. This puzzles me.<\/p>\n I see nothing heroic about dying with a fortune. I see nothing noble about saving and saving and never spending. Money is a tool<\/a>. Its purpose is to provide comfort and pleasure for ourselves and for others. Saving isn’t an end in and of itself. We accumulate savings so we can do the things we want to do.<\/p>\n In the past, I’ve been close to the vest regarding my financial situation. My attorney, my accountant, and my ex-wife all wanted me to keep things quiet. However, after some recent conversations — including one with Pat Flynn<\/a> — I’ve decided to be more transparent. I can’t (and won’t) reveal everything, but I’ll share some broad info.<\/p>\n I’ve already shared that I’m currently outspending my income by about $2,000 per month because of travel. That’s what got some people riled up last week. I’ve also shared that I have enough medium-term savings to maintain this deficit until the end of 2014 (meaning I have about $25,000 saved for this purpose). I also have about $5,000 in emergency savings. Plus, I’m fortunate to have over a million dollars in long-term retirement savings.<\/p>\n In an ideal world, I’d be earning an income that meets my expenses. And, in fact, that was the whole point of last week’s article; I’m looking for ways to bring earning and spending into alignment. At the same time, I feel no shame about outspending my current earnings by $2,000 per month. Why not? Because that’s what my money is there for.<\/em><\/p>\n If I were still in debt, this $2,000 monthly deficit would be a concern. If I had only minimal savings, it would still be a problem. But I’d argue that even for somebody in the third stage of personal finance, deficit spending for a short time is perfectly acceptable. And if you’re in the final stage of personal finance? Well, then that’s actually how you’re expected to be living. When you’re retired, you’re drawing down your capital.<\/p>\n In fact, the fundamental problem of personal finance is figuring out how much to save so that you can live off your investments in retirement and die with a zero balance. (Or, if it’s your intention, to leave money to others.) A quick calculation (using conservative assumptions) shows that I could choose never to work again and even if I lived until 80, my assets would allow me to live on about $4,000 per month for the rest of my life. If I sold my condo, that number would climb to $5,000 per month.<\/p>\n And if I chose to spend $2,000 per month, which was the idea that created such a fuss last week? According to FIRECalc<\/a>, my money will probably never run out<\/em>! And, in fact, because of the extraordinary power of compounding<\/a>, my savings will continue to grow forever.<\/p>\n Last week’s discussion was fascinating. If I were to draw down my savings in one fell swoop in order to buy a car or to purchase a house, I doubt anyone would object to my actions. After all, that’s how we think savings should be spent. But because I’m choosing instead to use my savings to fund travel and to buy time while I look for additional ways to make income, some people think I’m being foolish.<\/p>\n I suspect that even after this long discussion of saving and retirement, there will still be folks who believe it’s irresponsible for me (or anyone else, for that matter) to draw down savings for this sort of thing. If that’s you, tell us what you find objectionable. Under what conditions do you<\/em> believe it’s okay to draw down savings?<\/strong> Does it matter which phase of personal finance you’ve reached? How do you decide when it’s okay to use the money you’ve saved to do the things you want to do?<\/p>\n","protected":false},"excerpt":{"rendered":" Last week, I wrote about a conversation with my investment adviser. In the article, I mentioned that my current income roughly covers my current spending except<\/em> that I’ve been spending an average of $2,000 per month on travel. Because of that spending deficit, I’ve been drawing down my medium-term savings, which should last me until the end of 2014. Meanwhile, I’m exploring a variety of options to bring the income and spending into equilibrium.<\/p>\n Some GRS readers were taken aback by this.<\/p>\n<\/span>The Stages of Personal Finance<\/span><\/h2>\n
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<\/span>What Are Savings For?<\/span><\/h2>\n
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<\/span>My Own Situation<\/span><\/h2>\n
<\/span>The Bottom Line<\/span><\/h2>\n