Saving Money

The greatest contribution that any one person can make to their financial wellness is not actually so much a monetary contribution as it is intellectual. By taking the time to document a fully thought-out savings plan, we are able to maximize the value we receive in return from our contributions.

Similar to the way in which a financial advisor spends time in researching the merits of a given investment, such a plan allows us to examine the different kinds of benefit that we can create within our personal lives, and choose which aspects will create for us the greatest long term impact. Beginning with a section describing how to stage out a set of savings objectives over varying time horizons, this segment will provide you with a framework for building a long-term savings plan for personal wellness.

  • Objectives
  • The biggest thing to remember throughout the process of building a savings plan is that we need to be saving towards a set of goals. Without goals, our funds are arguably worthless, because they will just remain stagnant in our account without a purpose. That’s not to say that it’s a bad thing to have funds kept in an account without an explicit purpose, but it’s important to keep in mind that money is only worth what you spend it on.

    If you have funds set aside for education or retirement, then that’s where those savings derive their value from. Alternatively, if you have funds set aside without a specific purpose, their value will come from your belief in the future opportunities that will be presented. With that in mind, we can begin by looking at our long term savings objectives.

    The long term objectives of our savings plans aren’t meant to be specific. Their role is to provide a framework that will direct our short and medium-term goals. If we know that, over the long term, we want to retire comfortably with a certain amount of money available for a yearly salary, we might focus more on settling down our liabilities and building up our actual cash amounts than if we wanted to build credit to start a business (which would likely involves taking on a great deal of debt).

    With that in mind, remember to keep your long-term objectives as broad as possible. The easiest way to do this is to restrict them to being a single sentence long.

    From a medium term perspective, we want to begin sculpting objectives that represent some much more specific representations of our long term goals. However, it is a good idea to keep these goals somewhat general, in that we are not likely able to put down numbers yet at this point, because we cannot predict the future that accurately.

    For example, we might want to have ownership of our home in a number of years, but we might not want to specifically define a medium term goal of wanting to be debt free, because it rules out the opportunities of a secured line of credit. Medium term goals should instead be visualized as building blocks that build up long term objective structures. Desires to complete an educational program or to make a major purchase all fit into this category.

    Lastly, the most pressing part of a financial plan to take into consideration is the section of short term goals. These will be very specific objectives that act as the grain that builds up our medium-term ‘bricks’. These objectives should have specific numbers attached to them, and should define dates and accounts that we are particularly interested in.

    This means that we will have many short-term goals for every medium-term goal, each of which specifically addressing an aspect of our financial position. This is the point where we begin to describe a desire to pay off a specific debt, build up a specific amount of credit, or build up an amount of funds in a given account. These are the goals that we will actually be reviewing on a regular basis, to make sure that we are continually on track

  • Financial Positioning
  • Upon determining our savings objectives, we need to begin looking at our current financial position, and how it is that it adds to or hinders our objectives. By breaking our financial lives up into an analysis of assets, liabilities, incomes, and expenses (similar to the way in which a corporation reports to its investors) we can discover what aspects of our position would serve the greatest benefits, and contribute the most to our progress towards our long-term goals. When looking at all of these aspects of positioning, try to work future values for these accounts into short term goals, so that you have specific numbers to work towards.

  • Assets/Equity
  • The first thing to ask ourselves about when developing a savings plan is ‘what do I own?’ By cataloging what assets we have under our control that create or hold value, we can also determine a future value of what we would like to own later on as a goal. Things to take into account include a home, a vehicle, or any investment assets that also hold value.

    Additionally, we want to consider recreational assets that create value for our lives either financially or otherwise. For example, while a vacation package doesn’t necessarily store value in the financial sense, it might contribute to our goals, and should therefore be something to list. From here, we then want to account all cash balances that we have as they currently stand, as well as any lines of credit that we have funds available in.

  • Liabilities
  • Having determined what assets we have under our control, we need to then make a record of what amounts of money we owe against those assets. Whether they are secured or unsecured, it is important to understand that all debt represents some form of claim against our assets. This is because a default on a loan will result in a collections claim that will lay our assets on the line.

    This account should include all outstanding debts, including mortgages, lines of credit that have been accessed, credit card debt, and personal loans (ie. IOUs). By balancing our debts, at least on paper, against our assets, we can at least conceptually keep in mind our total net worth by subtracting our total liabilities from our total assets. This net worth metric in itself can act as a short or medium term goal.

  • Incomes
  • By examining our assets and liabilities, we can determine our financial position at an exact point in time. From there, we want to make the position more dynamic by introducing elements of income. Incomes represent our ability to cover liabilities and expand assets. As such, we should only include those incomes that are recurring, predictable, or large enough to have a material impact on our financial position.

    While gambling is not really a good income to record, employment income, investment income, and even personal incomes from gifts and inheritance can be placed into this group. However, it is maybe not a good idea to include capital gains from a speculative investments into this category, because the volatility of these gains means that they can just as quickly turn to losses, and maybe shouldn’t be depended on. Remember, we’re building a plan that requires predictability, accountability, and stability. Everything else just counts for bonus points.

  • Expenses
  • After determining the rate at which our financial position is growing, we should then look into the rate at which expenses are shrinking our position. Ideally, these expenses will only serve to reduce our incomes. That being said, expenses exceeding incomes would be a major reason as to why many people find themselves building up liabilities. That being said, it is important to remember that large expenses are not really a bad thing. For example, tuition expenses can be seen as an investment in your future ability to generate incomes.

    Living expenses might be reflective of an improved quality of life, which is included in our long-term goals. Lastly, recreational expenses may also demonstrate that we are actually meeting our goals, even though they involved taking on calculated liability or expense. The trick for this account is to make sure that everything is taken into context against the total savings plan. Calculated expense with a long-term purpose is good. Frivolous expense without structure is bad.

  • Working towards Financial Goals
  • Having built up a contextual understanding of our financial position and goals, we can begin to look at how we want to apply our funds towards building a practical strategy for saving. In general, we can define these strategies as being focused on building credit, making a major purchase or investment, building a retirement fund, or pursuing a lifestyle-based investment. By then combining all of these aspects together into a single savings plan, we are much better able to address the specific aspects of our financial position that will create the most benefit over the short, medium, and longer terms.

  • Building Credit
  • While building credit is a fairly complex subject that can take up an equally large discussion on its own, it can still be summarized as a savings strategy in here. In general, building credit is done by strategically expanding lines of credit and making payments to existing liabilities. By focusing in on existing liabilities, debt-related expenses, and incomes, a savings plan can be structured to ensure that a financial position’s ability to pay off debt improves dramatically within a two year period, and therefore creates a great improvement in the saver’s credit rating itself.

  • Major Purchase
  • Major purchases like homes and investments can be evaluated on their own as a savings objective. Buying property is a perfect example of this, because of the way in which the asset stores value as an investment on its own, but also usually comes with its own liabilities as well. By planning out purchases, we can evaluate how to best approach them, and when they can best be accommodated.

    For example, before taking out a mortgage to buy a new home, it might be a good idea to build up credit in advance so as to secure a better interest rate. Alternatively, purchasing a vacation package entirely on debt might not be a good idea if there are no future incomes that will help to cover this expense. By taking into account how it is that the purchase will impact a financial position both now and in the future, we can evaluate where to best fit in the purchase in our plan.

  • Retirement Income
  • Saving for retirement is another major goal on people’s list of objectives. However, the trick to this one is to save for income, as opposed to saving for a place of funds to use up. The objective of retirement should be centered on building a principle base that can pay interest amounts to the holder for the rest of their life. This means that retirement savings will be heavily focused on building up investment income from assets, and reducing liabilities as much as possible, so that incomes can cover living expenses in perpetuity. This is generally accomplished by putting aside incremental income amounts into stable investment assets that will remain when the saver retires.

  • Personal Investment (business or school)
  • A personal investment objective is very similar to a major purchase, in the way that it is usually accompanied by debt or a period without income. Pursuing education or starting a business are both a perfect example of how these can be found in life. By engaging in a personal investment, we are improving our own ability to earn income in the future, at some sort of sacrifice today.

    By going to school, we will likely require a student loan, which we will hopefully be able to pay off later with a better job. When starting a business, we will likely require a business loan that will be paid off by sales, which will hopefully translate into a better quality of life in the longer-term. By taking on this kind of objective, we are focusing in on liabilities and expenses, and balancing them against the prospect of future earnings.

  • Lifestyle
  • The final savings objective that will be discussed in this segment revolves around the idea of creating intangible value through quality life. This regularly includes the purchase of investments, or family planning. From a financial standpoint, purchasing a vacation package or having another child doesn’t really make sense. However, these are both extremely important to maintaining quality of life, and should be included into savings plans as major objectives to pursue.

    Specifically, we can look at these as being major expenses that are balanced out against the incomes needed to counter them, as well as the additional assets required to maintain them. Realistically though, we don’t really want to be taking on additional liabilities for a vacation, and we can’t really count on a new child’s ability to produce new incomes in any time soon.