The Four Types of Saving
Most of us are familiar with at least one type of saving: retirement saving. For many people, that is as far as it goes. They equate retirement saving with saving in general and use credit to finance all other expenditures that exceed their monthly cash flow.
However, those who plan to live debt-free will need more than retirement saving, they will have to employ four specific types of saving:
1. Retirement Saving: This is money set aside to fund retirement. It is placed in long-term, tax-favored investments. Do not touch it until retirement.
2. Emergency Fund: This is money set aside to cope with an interruption in income due to a job loss, reduction in pay or hours, medical emergency, displacement due to a natural disaster, etc. Put this money, equivalent to three to six month’s living expenses, in an account that allows immediate access such as a money market account at an insured bank or credit union.
3. Budget Line Items: This is money set aside each month and accumulated in budget accounts for future budgeted expenses. Examples of budget line items that accumulate substantial balances are: house maintenance and repair (including the homeowners insurance deductible), auto maintenance and repair (including the auto insurance deductible), appliance replacement, medical co-pays and deductibles, travel/vacation, clothing, gifts (Christmas fund), and so on.
The money in most of these budget accounts will accumulate for months, possibly years, until there is a need. Where you put this money depends on the purpose of the budget account. For example, you can plan ahead for auto and appliance replacement. You might want to accumulate this money and put it into short-term certificates of deposit once a year. For most budget line items, however, you will want to get your hands on the money immediately when a need arises. Keep the money from those accounts in a money market account, or something similar, at an insured bank or credit union
Note: Rosa and I have investment income and own our house outright. Consequently, we save for property taxes, the homeowners insurance premium, and income taxes in addition to those budget line items noted above.
4. Targeted Saving: This is money set aside for specific expenditures or purchases such as college tuition, a down payment on a house, a vehicle purchase, house remodeling or room addition, the capital to start a business, or a big ticket purchase (boat, RV, big screen TV, swimming pool, etc.). Funds for these accounts will find their way into longer-term certificates of deposit and similar insured accounts.
The key to prospering without debt is to plan ahead and save. To do that effectively, utilize the four types of saving.
K.C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages.
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