First there’s the underwear money. Then there’s the go-bag money. Then there’s the money in the safe. Then there’s the change jar. Then there’s the actual savings account. If you can keep track of all that, then great! You absolutely have the aptitude for financial independence.
When you’re broke, saving money isn’t always possible. I’ve been in the unenviable position of having two roommates and still paying more than half of my income in rent. In fact, in the first month of my life as an independent adult, I earned $300 net and my rent was… $300. Tricky. Why I still love potatoes and oatmeal is something of a mystery. The most important two things when you are that broke, potato-with-no-butter broke, are to keep planning for an easier future and to figure out some side gigs.
When you’re broke, it’s even more important to plan for the future than it is for everyone else. Why? Because if you always live hand to mouth, if every penny is already claimed before you even earn it, then there’s nothing left for Future You. Future You will be exactly like Present You, except old and exhausted and probably unemployable and also probably frail and ill. Imagine being so tired you physically can’t even get up a flight of stairs, and then imagine that Present You plans to force Future Old You to commute to work every day. Come on. That’s not going to work. Saving money is not optional. You have to figure it out.
Okay, let’s cheer up a bit and assume that you already are prosperous enough to be able to save some money. The great thing is that the more you learn about finance, the more money you wind up having, and the easier your life gets. The more money you have, the more nice things you can do for other people. Yay money!
Savings is a cushion. The main purpose of a savings account is to have money ready for an emergency. Interestingly enough, the way we define “emergency” tends to change depending on circumstances. New tires? A new transmission? Veterinary surgery? The goal is to have enough of a savings cushion to avoid putting unanticipated emergency expenses on a credit card.
A shocking survey came out in 2016 indicating that nearly half of Americans couldn’t come up with $400 in an emergency. That was true for me up until, say, 2005. I wouldn’t even have been able to do it with a credit card prior to 1997. I completely get what it’s like to be flat broke. It sucks. Stop doing it.
I started working for money when I was 10 years old. The lightbulb went on. If I took the opportunity to babysit or do any other random cash-generating activity I could think of, I could BUY THINGS. The first time I bought myself my own restaurant meal, I took $5 down the street to Charburger and bought a cheeseburger, fries, a drink, and a hot fudge sundae. It was magnificent. I couldn’t do algebra yet, but I could earn nice green dollars and use them for lifestyle upgrades. I used to have a little tin with a cat on it where I stashed my babysitting money. I was poor for a long time, but I did always believe in that power to go out and hustle up small amounts of cash.
The only problem was that it never occurred to me to wonder whether there was an upper limit. What if I could earn… more?
This is where the concept of saving comes in, as opposed to “savings.” A process, not a specific amount in a sock.
Those of us who are savers have generally been taught frugality, either through positive or negative examples. Some of us were trained to respect the power of money, while others stood by and watched some outrageous nonsense and learned about the perils of scarcity mindset through others’ mistakes. Usually, we have not been taught the more abstruse and complicated ways of finance. Personal finance classes in high school do not teach investment as a skill. Apparently many of us aren’t even getting the basics of consumer finance, like how to balance a checkbook or plan a budget. Much less are we taught how to build a financial empire.
The difference between “saving” and “savings” is that “savings” means whatever specific dollar amount you have put away. For many people, there’s an explicit goal. If I have X amount, then we’re okay, and if we need to spend it for some reason, then we need to tighten our belts for a while until we build it back up. This is great. Unfortunately, it doesn’t always include the sense that this savings cushion can and should be steadily increasing. A savings cushion doesn’t always include the idea that we can and should only live on a certain percentage of our earnings, setting aside as much as we can for Future Us.
Most people don’t spend every penny they earn. They spend every penny they earn AND a bunch of what they think Future Self will earn! If stuff is getting put on a credit card, then we’re spending the future.
It’s kind of like this.
Spend 101% = debtor
Spend 100% = accident waiting to happen
Spend 90% = keep going
Spend 65% = my husband and me
Spend 37% = Mr. Money Mustache
Having a savings account is fantastic. If you have one at all, good. Apparently, if you have $400 in it, you’re already better off than half of your fellow Americans. You like that savings account? It makes you feel a sense of security and satisfaction? Nice? Nice? Okay, let’s peek ahead and see how many other kinds of savings accounts there are. I know you’ll like them, too.
Scattered coins all over the place. You’re “one of mine” and your finances are a disaster.
Change jar. The secret code that tells me your household makes too many cash purchases that aren’t being tracked.
Underwear money. The place where you hide cash in your house for just in case.
Savings account. Basically a way to protect yourself if you overdraw your checking account. If you’re earning as much as 1.5% interest in your savings account, that’s amazing but wow, can we do better than that.
Holiday and taxes account. I had one of these at my credit union when I got divorced, and I had literally forgotten about it because it only had quarterly statements. When I realized I had another $1200 put away, I almost fell over in the street. It’s a kind of account where you can only take the money out twice a year, and it earns more interest than a regular savings account.
CD, or certificate of deposit. Funny how many people have actual CDs, or compact discs, but not “the good kind.” Rates vary depending on how much you’re saving and how long you’re planning to leave it in the account, but basically you can get 2% interest. Some people make a “ladder” out of CDs that come due at different dates.
IRA, or individual retirement arrangement. (Trust me, I looked it up just now). This is a way to save money for retirement. There are two kinds, one where you put in the money pre-tax and pay taxes when you take the money out, and the other where you take it out of your net income so the taxes are already paid. Not everyone can use IRAs because there’s an earnings cap. Basically, you can do $5500, more if you’re over 50. That’s about $100 a week. You don’t have to have the full $5500 to do it, though. Even if you can only save $100 a year, you can still open an IRA account. There aren’t any requirements that you keep putting money in or anything like that. This is a way to put money in the stock market.
401(k) or whatever. This is the retirement savings they set up for you at work. It’s the way most people start investing in the stock market. Some companies offer a match up to a certain percentage of your income, and there are a lot of wild and crazy, spontaneous party animals out there who turn their noses up at this free money every year. “We’ll give you thousands of extra dollars if you fill out this form and get slightly less in your net paycheck.” “NO”
There are tons of other financial investment vehicles out there. If you get to that point, study carefully, because everybody wants to get their beak wet. All that nice money, and someone always wants to carve out a percent for themselves. Although, of course, that’s certainly a poor reason to avoid saving and investing.
Saving money means trust in a better future. It means I don’t have to spend every penny today, because there will be plenty more in the future. I’m not missing out on anything, I’m gaining, because my money will get together in the dark with all the other money (just like wire clothes hangers) and start getting friendly. The reason more people don’t save and invest is because we think it’s just sitting there, like pennies in a jar. We’d be more excited about it if we realized that investment is more like Tribbles or dandelions. Every time you turn around, it’s turned into more and more.
I've been working with chronic disorganization, squalor, and hoarding for over 20 years. I'm also a marathon runner who was diagnosed with fibromyalgia and thyroid disease 17 years ago.