Introduction to Saving

Saving is difficult for many people because it involves decreasing current consumption and investing in a future standard of living. Some individuals incorrectly view savings as what is remaining after their current wants and needs have been satisfied. The future is an unknown risk for people, which is one of many reasons why they have such difficulty saving money. Without developing a savings and investing plan and making savings a priority by paying yourself first, individuals will not have the financial means to meet future financial goals such as purchasing a car, putting a down payment on a home, and meeting retirement needs.   It is important to understand the difference between savings and investing. Savings is the portion of current income not spent on consumption.  Savings accounts provide an easily accessible place for people to store their money to meet daily living expenses and to have money for emergencies. Financial experts recommend individuals keep a minimum of three to six months of salary is in a savings account. Savings accounts generally yield a lower interest rate than investments, but are more secure in that the saver will not lose their principle. The interest rate refers to the percentage rate paid on the money saved or invested.

Investing is the purchase of assets with the goal of increasing future income. There is a large variety of investment opportunities that vary dramatically in the rates of return investors receive. Rate of return refers to the annual return on an investment including appreciation and dividends or interest. A prerequisite to investing is to have a developed and implemented savings plan before a person begins investing.  Liquidity is how quickly and easily an asset can be converted into cash. If an individual were to have an emergency, cash needs to be easily accessible. Savings accounts are more liquid than investments because a person can easily get money out of a savings account in a few minutes, while it is harder to get money out of an investment because they are not easily accessible.

Saving money should be viewed as a fixed expense. A popular adage describing this is “pay yourself first,” which means to take out a portion of a paycheck for saving or investing before using any of the check for spending. Each time a person receives money, it should be divided by the 70-20-10 rule. This implies to spend 70% of the money, save 20% of the money, and invest 10% of the money. An individual who follows this advice is well on his/her way to financial success. The 70-20-10 rule is ideal. However, it may be unrealistic for some individuals. A person’s values or philanthropic gestures may prevent them from saving and investing 30% of their income. In such an instance, it is acceptable to save less as long as one has initiated a savings and investing plan they adhere to allowing them to continually save a fixed amount. A savings plan is a strategy for putting a portion of money from current income aside, which will not be spent on consumption, to reach a specified goal.  In this lesson, participants discuss the difference between savings and investing and learn the importance of saving. They have the opportunity to brainstorm reasons to begin saving and why some people do not. Participants also evaluate recommended savings guidelines and develop a savings goal for themselves.