What is your definition of 'Savings'?

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luckybamboo
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What is your definition of 'Savings'?

Post by luckybamboo » Wed Apr 05, 2017 6:51 pm

We have following buckets of savings -
1. Retirement Savings (401K, IRA) and HSA
2. 529 Plans
3. Savings for Various Future Big Ticket Items (Cars, Remodeling)
4. Replenishing Emergency Funds (if used during the year)
5. Extra Mortgage Payments
6. Taxable Investments

When the 'pundits' say, 'Save 20% of Gross Income', do they include all of the above or only #1 and 6

What kind of savings make up your savings number ?

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JoMoney
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Re: What is your definition of 'Savings'?

Post by JoMoney » Wed Apr 05, 2017 6:59 pm

I seem to use 'savings' a couple different ways.
Sometimes I use 'savings' as being any portion of income that's not spent.
Sometimes I use 'savings' to mean my entire accumulated portfolio of assets and investments including the growth and capital gains.
Sometimes I use 'savings' to mean only the cash or cash equivalent portion of my investment portfolio.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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knpstr
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Re: What is your definition of 'Savings'?

Post by knpstr » Wed Apr 05, 2017 7:04 pm

It's hard to speak for them, but I think the pundits mean:

1,4,6
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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bligh
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Re: What is your definition of 'Savings'?

Post by bligh » Wed Apr 05, 2017 7:11 pm

knpstr wrote:It's hard to speak for them, but I think the pundits mean:

1,4,6
+1

2. Allocating for spending later
3. Allocating for spending later
5. Paying down debt

avalpert
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Re: What is your definition of 'Savings'?

Post by avalpert » Wed Apr 05, 2017 7:12 pm

Savings is any income not spent.

Extra mortgage payments, or any other form of paying off debt, are not savings - that money was already spent and you are just now handing it off. They may be neutral to your net worth, but they are not savings.

avalpert
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Re: What is your definition of 'Savings'?

Post by avalpert » Wed Apr 05, 2017 7:14 pm

bligh wrote:
knpstr wrote:It's hard to speak for them, but I think the pundits mean:

1,4,6
+1

2. Allocating for spending later
3. Allocating for spending later
That doesn't make any sense. Retirement savings are also allocating for spending later - just because you put a specific label on what you are planning to spend it on in the future doesn't make it spent, it is still savings.

KlangFool
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Re: What is your definition of 'Savings'?

Post by KlangFool » Wed Apr 05, 2017 7:15 pm

luckybamboo wrote:We have following buckets of savings -
1. Retirement Savings (401K, IRA) and HSA
2. 529 Plans
3. Savings for Various Future Big Ticket Items (Cars, Remodeling)
4. Replenishing Emergency Funds (if used during the year)
5. Extra Mortgage Payments
6. Taxable Investments

When the 'pundits' say, 'Save 20% of Gross Income', do they include all of the above or only #1 and 6

What kind of savings make up your savings number ?
OP,

Only #1 and #6 for me. There is no #2. I do not save for college.

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Re: What is your definition of 'Savings'?

Post by KlangFool » Wed Apr 05, 2017 7:17 pm

avalpert wrote:
bligh wrote:
knpstr wrote:It's hard to speak for them, but I think the pundits mean:

1,4,6
+1

2. Allocating for spending later
3. Allocating for spending later
That doesn't make any sense. Retirement savings are also allocating for spending later - just because you put a specific label on what you are planning to spend it on in the future doesn't make it spent, it is still savings.
avalpert,

Why does it have to make sense for you? Your choice your life. My choice my life. To each its own.

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avalpert
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Re: What is your definition of 'Savings'?

Post by avalpert » Wed Apr 05, 2017 7:21 pm

KlangFool wrote:
avalpert wrote:
bligh wrote:
knpstr wrote:It's hard to speak for them, but I think the pundits mean:

1,4,6
+1

2. Allocating for spending later
3. Allocating for spending later
That doesn't make any sense. Retirement savings are also allocating for spending later - just because you put a specific label on what you are planning to spend it on in the future doesn't make it spent, it is still savings.
avalpert,

Why does it have to make sense for you? Your choice your life. My choice my life. To each its own.

KlangFool
Well, it doesn't have to in an existential sense - and I never said it has to only that it doesn't.

Words used in communication have general meanings and it is best to be consistent to those meanings. Anyone is free to call their toenail clippings savings if they like, but for use in a personal finance forum it would be prudent for others to point out that that doesn't make sense.

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Re: What is your definition of 'Savings'?

Post by KlangFool » Wed Apr 05, 2017 7:29 pm

avalpert wrote: Well, it doesn't have to in an existential sense - and I never said it has to only that it doesn't.

Words used in communication have general meanings and it is best to be consistent to those meanings. Anyone is free to call their toenail clippings savings if they like, but for use in a personal finance forum it would be prudent for others to point out that that doesn't make sense.
avalpert,

<< Words used in communication have general meanings and it is best to be consistent to those meanings. >>

I do not assume that. In fact, I found that there is no consistency at all. Hence, I always ask folk precisely how they count their number. Ditto on expense.

KlangFool

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tinscale
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Re: What is your definition of 'Savings'?

Post by tinscale » Wed Apr 05, 2017 7:29 pm

My “savings” is the cash in checking/savings accounts and a CD. It won’t go away unless I spend it, and if the bank folds the FDIC will make good on it.

If my IRAs and 401ks are confiscated, and my stock and bonds funds all go belly up, I still have my savings. I suppose you could say it includes emergency funds.

I also have the Thrift Savings Plan G Fund which supposedly can never go down, but I count that in my bond allocation and not as "savings."

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Re: What is your definition of 'Savings'?

Post by Grt2bOutdoors » Wed Apr 05, 2017 7:36 pm

knpstr wrote:It's hard to speak for them, but I think the pundits mean:

1,4,6
+2
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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bligh
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Re: What is your definition of 'Savings'?

Post by bligh » Wed Apr 05, 2017 7:41 pm

avalpert wrote:
bligh wrote:
knpstr wrote:It's hard to speak for them, but I think the pundits mean:

1,4,6
+1

2. Allocating for spending later
3. Allocating for spending later
That doesn't make any sense. Retirement savings are also allocating for spending later - just because you put a specific label on what you are planning to spend it on in the future doesn't make it spent, it is still savings.
The OP referred specifically to rules such as "Save 20% of Gross Income". These are in reference to funding your retirement.

Put another way if I could save 20% of gross income to spend it all within the next 6 months or a year on a shiny benz, then would you say that I was doing great by the rule? Or can I put 20% of gross income in my 529 plan and I am saving well for retirement.

No these are expenses that you need to save for, but in my humble opinion I agree with knpstr, the "pundits" refer to saving as 1,4,6 from his list. They have separate rules for how much to save for life expenses such as buying a house, a car or budgeting and paying for your kids education. The 20% does not include these.
Last edited by bligh on Wed Apr 05, 2017 7:45 pm, edited 1 time in total.

drawpoker
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Re: What is your definition of 'Savings'?

Post by drawpoker » Wed Apr 05, 2017 7:43 pm

To get down to brass tacks -
Here is an example of "savings" -

Saks has a dress I like that is marked down from $200 to $100. The ad screams "Save $100! "


Now, if I buy the dress, have I "saved" $100? No. I spent $100

If I don't buy the dress, have I just "saved" $100 ? Well, yes and no. Depending on, um, just what is your definition of "Savings".

Seriously, studies of consumer buying habits have consistently shown that the public clings to this belief that if they buy something that is drastically marked down they are enjoying some sort of "savings". Irrespective of whether the purchase is something that is actually needed (like a new roof or a furnace) or something bought on a whim.

Grt2bOutdoors
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Re: What is your definition of 'Savings'?

Post by Grt2bOutdoors » Wed Apr 05, 2017 7:57 pm

drawpoker wrote:To get down to brass tacks -
Here is an example of "savings" -

Saks has a dress I like that is marked down from $200 to $100. The ad screams "Save $100! "


Now, if I buy the dress, have I "saved" $100? No. I spent $100

If I don't buy the dress, have I just "saved" $100 ? Well, yes and no. Depending on, um, just what is your definition of "Savings".

Seriously, studies of consumer buying habits have consistently shown that the public clings to this belief that if they buy something that is drastically marked down they are enjoying some sort of "savings". Irrespective of whether the purchase is something that is actually needed (like a new roof or a furnace) or something bought on a whim.
I cling to the belief that if I buy equities or bonds when they are drastically marked down I am enjoying some sort of "savings" even if I don't need (not actually true) to accumulate it. :D
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

drawpoker
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Re: What is your definition of 'Savings'?

Post by drawpoker » Wed Apr 05, 2017 8:04 pm

[quote="Grt2bOutdoors".....I cling to the belief that if I buy equities or bonds when they are drastically marked down I am enjoying some sort of "savings" even if I don't need (not actually true) to accumulate it. :D[/quote]

Those aren't "savings"

That is "strategy"

:wink:

avalpert
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Re: What is your definition of 'Savings'?

Post by avalpert » Wed Apr 05, 2017 8:08 pm

bligh wrote:
avalpert wrote:
bligh wrote:
knpstr wrote:It's hard to speak for them, but I think the pundits mean:

1,4,6
+1

2. Allocating for spending later
3. Allocating for spending later
That doesn't make any sense. Retirement savings are also allocating for spending later - just because you put a specific label on what you are planning to spend it on in the future doesn't make it spent, it is still savings.
The OP referred specifically to rules such as "Save 20% of Gross Income". These are in reference to funding your retirement.

Put another way if I could save 20% of gross income to spend it all within the next 6 months or a year on a shiny benz, then would you say that I was doing great by the rule?
No, because your savings rate over 6 months or a year would be nowhere near 20% - since you spent the money. But if you had in account earmarked to be spent in the future it is not yet spent and that earmark isn't etched in stone.
Or can I put 20% of gross income in my 529 plan and I am saving well for retirement.
Yes you are, you are putting away the money now and it will be available to spend later. When you take the money in the future out of the 529 to pay education expenses, you will have to spend less from cash flow which can then go to the best available savings vehicle for you at that time - in the interim you are earning tax-free returns on your savings.

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bligh
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Re: What is your definition of 'Savings'?

Post by bligh » Wed Apr 05, 2017 8:29 pm

avalpert wrote: No, because your savings rate over 6 months or a year would be nowhere near 20% - since you spent the money. But if you had in account earmarked to be spent in the future it is not yet spent and that earmark isn't etched in stone.
Fair enough. You are saying that saved money for a future expense is still saved money, and even if you are planning to spend it on a shiny benz at some point, the expense hasn't taken place yet therefore the money is still in your posessions and it is still yours and you have saved it and the hit will occur when actually cut the check and make a purchase. In the literal sense, the money is indeed saved until you actually spend it.

I still disagree with you though.

It isn't accurate in context of the OP. The "pundits" aren't telling you to put aside 20% of your money each month for "future expenses". They are telling you to do it for retirement.

If you stretch the definition to include future expenses that may or may not occur the advice to put aside 20% is no longer actionable.

If I didn't believe that the "pundits" mean put "20% aside with no intention of touching it till retirement". Here is how I could (hypothetically) end up at 65.

I make $10K a month. I put aside $2K / month towards my benz.

20 months in.. I have $40K. Since I am financially wise, I will be money smart... I will pay for my pre owned Benz in cash!

It's okay though, the month I bought my benz, I still put aside my 20%! .. My balance is back at $2K...

20 months go by.. my benz is not feeling shiny anymore.. I notice I have $40K in my account again! My benz can be traded in for $20K now.. so I will go for a shinier $60K Benz!

.. rinse and repeat till age 65....

Me @ 65: "I don't understand! I followed the rules! I saved 20% each and every month like they told me to! I never took on a penny of debt! I worked hard... where is my comfy retirement? All I have in my bank account is the $10K I saved in the last year and my shiny benz!"

* edit.. I re read your post and I think I see where you are coming from. You are saying for any given year, your expenses should not exceed 80% of your income.. and as long as you can stick to that you will be okay. In the years I bought the benz, my expenses exceeded my income for the year, therefore I wasn't following the rule. Thought then I must ask, what do you do where you know your expenses will exceed 80% of your income for the year? Such as a 529 plan or when I buy my shiny benz? Just don't ever do it?

avalpert
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Re: What is your definition of 'Savings'?

Post by avalpert » Wed Apr 05, 2017 8:46 pm

bligh wrote: I make $10K a month. I put aside $2K / month towards my benz.

20 months in.. I have $40K. Since I am financially wise, I will be money smart... I will pay for my pre owned Benz in cash!

It's okay though, the month I bought my benz, I still put aside my 20%! .. My balance is back at $2K...
But of course your cumulative savings rate is no longer 20% - and you didn't put aside your 20% in that period. Your savings rate that period is -480% (48,000 in expenses on 10,000 in savings).
It isn't accurate in context of the OP. The "pundits" aren't telling you to put aside 20% of your money each month for "future expenses". They are telling you to do it for retirement.

If you stretch the definition to include future expenses that may or may not occur the advice to put aside 20% is no longer actionable.
To be clear, while that advice may be actionable I don't think it is particularly helpful. But for what it is worth sites like this seem to explicitly include non-retirement savings goals as part of the 20%.
If I didn't believe that the "pundits" mean put "20% aside with no intention of touching it till retirement". Here is how I could (hypothetically) end up at 65.

Me @ 65: "I don't understand! I followed the rules! I saved 20% each and every month like they told me to! I never took on a penny of debt! I worked hard... where is my comfy retirement? All I have in my bank account is the $10K I saved in the last year and my shiny benz!"

Thought then I must ask, what do you do where you know your expenses will exceed 80% of your income for the year? Such as a 529 plan or when I buy my shiny benz? Just don't ever do it?
And these are some of the reasons I don't think they are helpful. Actually, I think it is worse then helpful, I think it may be harmful - rather than focus people on saving a percentage of income they should be focused on keeping spending down as income comes up. The person who saved 20% of their income when they were making $30k and 20% when they were making $150k later in life was not following a good plan. They would have been better served saving less early on while finding a standard of living they could maintain as their income rose.

Also, I should have read your edit first.

TigerNest
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Re: What is your definition of 'Savings'?

Post by TigerNest » Wed Apr 05, 2017 8:56 pm

Whatever I don't spend or pay in taxes.

Ron Ronnerson
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Re: What is your definition of 'Savings'?

Post by Ron Ronnerson » Wed Apr 05, 2017 9:06 pm

There isn't a clear answer on this and I've wondered about it myself. For practical purposes, I just think of it as savings in bank and retirement accounts.

However, technically, I think it should perhaps include anything that increases net worth. For example, someone could take out a 10 year mortgage or a 40 year mortgage. The person could really pump up their retirement savings if they went with the 40 year term but it doesn't necessarily mean they'd be better off.

Also, I've been doing Roth conversions over the years. If I hadn't, I'd have more dollars saved. But isn't the money in a Roth account worth more? Yet I ignore that for simplicity.

I count contributions to our IRA and 457b accounts as savings but I ignore the fact that over 10% of my salary goes toward a pension. That pension is likely going to make a huge difference in our future though.

So, in short, it's tricky.

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bobcat2
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Re: What is your definition of 'Savings'?

Post by bobcat2 » Wed Apr 05, 2017 9:16 pm

How saving and savings are defined in financial economics.

Saving (without the terminal s) refers to a flow variable; the income that is not spent. Savings (with the terminal s) refers to a stock variable; the total value of the saving over time that has not been spent. Thus, savings are the totality of your financial assets. Asset allocation is how you invest your savings.

I realize that many Bogleheads will not be happy with how these words are defined in finance. Too bad! Just as we are not entitled to our own set of facts in the political realm, so it is in finance that we are not entitled to our own personal definitions of investment and financial terms.

BobK
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Re: What is your definition of 'Savings'?

Post by Jags4186 » Wed Apr 05, 2017 9:41 pm

From a practical standpoint savings is the amount of earned income you retain on a yearly basis.

Gross $100k
$20k to taxman
18k to 401k
12k contributions to a savings account/taxable account
60k spent

Savings rate = 30%

Ignore mortgage principal payments. Ignore dividends and distributions from held investments.

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mhc
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Re: What is your definition of 'Savings'?

Post by mhc » Thu Apr 06, 2017 9:52 am

They are all savings.

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CABob
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Re: What is your definition of 'Savings'?

Post by CABob » Thu Apr 06, 2017 2:56 pm

luckybamboo wrote:We have following buckets of savings -
1. Retirement Savings (401K, IRA) and HSA
2. 529 Plans
3. Savings for Various Future Big Ticket Items (Cars, Remodeling)
4. Replenishing Emergency Funds (if used during the year)
5. Extra Mortgage Payments
6. Taxable Investments

When the 'pundits' say, 'Save 20% of Gross Income', do they include all of the above or only #1 and 6

What kind of savings make up your savings number ?
All of the above could be considered to be savings, but I think that the 'pundits' mean money that is going to be available or destined to support retirement. So I think it is 1 and maybe 6. The others have identified uses so would likely not be available for retirement.
Bob

luckybamboo
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Re: What is your definition of 'Savings'?

Post by luckybamboo » Thu Apr 06, 2017 5:09 pm

Thanks everybody for clarifying my understanding.

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