Even though I share my financial reports every month, I don’t see increasing my financial wealth as a goal. The accumulation of money is not a destination. I am not aiming for any particular measure of financial worth, such as ten million dollars of net worth or one million dollars of passive income each year. While these milestones would be nice, they, or any other financial metrics, are only means to an end — or to no end.
Money is only worth what you can do with it. What is the point of accumulating a higher balance in a banking account or a higher value of investments if you never put that money to use? I will concede:
- Leaving money alone to appreciate through compound interest or investment gains is a great way to build wealth over time.
- Saving as much as possible when you are young allows you to have more options as you proceed along your journey through life.
But money has very little meaning now on its own. There is no money, there are only bits and bytes in banking institutions’ extensive computer server farms. You trust that when your banking institution says your bytes have changed to award you a higher number, you can connect that account to someone else and transfer your bytes to pay for an expense. In rare cases, you may even wish to turn those bytes into pieces of paper or coins.
So when I hear that someone’s goal is to have a nest egg of ten million dollars, it is an empty goal. This goal is nothing more than having bits and bytes in a certain configuration on a certain server in a database record associated with your identity. I accept that it will be difficult to get the bytes to arrange in that fashion, but look beyond this. What would you like to do with that money?
You may feel happy or proud when you reach this or any milestone you set for yourself, but wealth doesn’t do any good sitting in your bank account. I mentioned above that saving more now provides you with more options in the future, so rather than looking at a number, start deciding which options you would like to pursue. Here are a few in no particular order. Assign your goals to the reasons you are saving money, not the money itself.
Providing the basic necessities for yourself and your family. Many people build wealth simply so they can survive, sometimes with just the necessities and sometimes in the style to which they are accustomed. These financial needs, including shelter, food, water, and health, need to be taken care of before you can consider doing anything else with your money. If you plan to stop working and expect your income to cease, saving for the necessities is essential.
Leaving money to your heirs. If you don’t have children, perhaps this is not a concern. But many people do have children and would like their wealth to pass along to the next generation. Not everyone with children will choose to set aside money for their children. I have heard arguments claiming that children are better off without trust funds and what may be excessive support from parents, but I feel that children can succeed with as many options available as possible.
Education for yourself and your family. Analytical people suggest basing decisions about education based on your financial return on investment. If you spend $100,000 for a degree, or much more if you have loans with interest to pay, how quickly will your new degree allow you to recoup those expenses? Well, thankfully not everyone believes that the only value of education is the ability to earn an increased income. A life without teachers, non-profit organizations, researchers, and artists would not be worth living. Saving for future education expenses, for you or your children, will reduce the difficulty in affording an educational program that does not put one on track to become a hedge fund manager.
Be a positive force in the world. There is at least one issue that is important to every adult. Money allows you to change the world if you concentrate your funds towards that issue. For example, Bill Gates believes that it is despicable that people throughout the world are still dying of malaria, a preventable and treatable disease. Through the Bill & Melinda Gates Foundation, an organization whose existence is possible due to his financial success, Bill uses his wealth to help eliminate needless death in Africa.
It’s admirable to want to increase your wealth, but that can’t be a goal. It’s one step on the way towards other goals. Money is nothing by itself, particularly if it is sitting in your bank account.
Why do you save money?
Updated August 2, 2010 and originally published April 10, 2009.
{ 18 comments… read them below or add one }
I couldn’t agree more! It really helps my wife and I maintain motivation when we attach small achievements in our financial life to tangible long-term goals. Without this attachment it would be very easy to become overwhelmed with our financial goals.
I love the posts this week… they are providing lots of inspiration! Keep up the great work!
Great post, Flexo!
We automatically save for retirement (whatever form that takes), and for emergencies.
We also create short and long term goals and save for them based on what is important to us. The things that tend to be the most important are experiences. For instance we saved our change for 2 years so we could buy a puppy. Now we’re saving our change for a Disney vacation.
We save money because we want to have it, because it is required to live. We aren’t so much in charge as far as what we will have to pay for whatever we happen to need or want. To have money is to be ready, and also, while many people depend on the ability to borrow money, we are our own creditor. Our savings are what we borrow from and make payments to. When I say I want to amass millions of dollars, it is like having a credit line that high. The biggest threat I perceive to our wealth is the cost of medical care, and I base our financial goals on the lifetime limits that medical insurance companies used to have. Even though they certainly never paid the benefits, $2 million per person sounds like a reasonable amount to set aside for medical considering today’s costs. Should that system be overhauled as it should be, I would feel considerably less pressure to amass huge sums of money. People are most vulnerable in areas like medical and funeral costs, and I find it scary and disheartening that it is standard to be kicked when you are down in this society.
I absolutely refuse to save! But I do play a mind game with myself (?) and spend forward. I retired in January 2008 with sufficient pension income to meet my everyday expenses. I do leave my foundation accounts alone and allow their value to grow in terms of capital gains (haven’t seen many) and interest/dividends. My IRA, along with my wife’s IRA, three (non deferred) investment accounts and our home make up our foundation. Our bank account plus the spent-forward account is used for all expenses. My spent-forward account is really a sub-account within Quicken and maintained by category on an Excel spreadsheet. Categories include budget-busting bills (Car, Home, Medical Insurances as well as property tax) and all of those retirement goals we set, including next road trip, next cruise, next PC, etc. etc.
I even sweep excess income and unspent budget out my checking account each month and “spend” it in whatever category needs attention.
Why do I save? I don’t (well sort of) – but in my past life as an employee – I saved for this thing called retirement. I’m neither rich nor poor and looking back I see only two redeeming qualities (moneywise). I saved a moderate amount of my income and I’ve always feared debt. Your reasons for savings are great – keep at it. My kids will probably get the foundation assets, my wife and I will volunteer now and again and we hope to live out our lives without being a burden on anyone – but save – no way!
The concept of cross-disciplinary discussion is something that has been popular for about 20 years or so, and is done very effectively at the Santa Fe Institute (I’ve actually attended one of their wonderful seminars – very eye opening).
Economics (or financial management) is very similar to physics. After all, some of the most basic financial terms are related to physics. Take “leverage”. What is it? Basically, in finance, it’s debt with an asset backing it. It’s a means of putting value to work using something that is illiquid. In physics, it is the use of a fulcrum and lever (or other devices) to lift or move objects which ordinarily cannot be moved without external assistance. Very similar ideas from very different disciplines.
The comment that money shouldn’t be an end in itself is very true. Money is energy for the economy (think monetary velocity – another cross disciplinary concept). When it sits in the bank, it’s potential energy for you (it’s actually providing kinetic energy for the people who are using it to leverage their other assets).
So just saying that money is nothing in itself if it sits in the bank is NOT true. HOWEVER, if the relative use (relativity – another cross discipline concept!) of money as it relates to YOU is concerned, it IS true. If it’s in the bank, it’s not doing anything for you but gaining interest. Which is OK, but not the absolute best use of it.
But, like everything, there is a balance. You must have savings, investing, and spending in some kind of relationship. The law of conservation of matter and energy is immutable. You cannot create more energy than the existing amount of matter holds in potential.
The same is true of money. In order for values to grow, the economy must grow, which means new markets and fields of discovery opened. If all money is held constant, this can only occur if velocity increases – which means we have to invest and spend more and faster. There are limits to our capability of doing this. As a result, Central Banks increase the money supply to overcome the limiting factors of velocity, thus easing economic growth.
Even with the creation of money, the laws of monetary value remain immutable. Prices can only be equivalent to the amount of money in the system and how quickly it gets around. Add more money, prices will go up. Use it faster, prices will go up. And vice versa.
But if velocity and supply are held constant, you cannot create more than is held in potential.
This is why the balance of savings, investing and savings are very important. It’s also why you have to do your due diligence when you invest and spend (and save, to some degree). Just like in physics, energy can be wasted (what furnace is 100% efficient?), money can be wasted. It is only with effort and intelligence that we get a maximal output and return.
I can’t argue with the sound fundamentals you speak to but, with all due respect, I can not think of any word that I hate more than “leverage”. Especially now. Do you remember the commercial with the guy having and outdoor barbeque – he had it all (House,Car,Pool, etc.) but when asked how he did it he responded with a great big smile and said “I’m up to my eyeballs in debt!” Leverage is debt. You describe it as debt but added the caveat that it was backed by an asset. There are far to many banks, brokers, and retirement plans out there that learned that leverage without asset value is just plain debt and taxpayers are paying to maintain what “velocity” is left. No-risk (ha) mortgage backed securities bundled into bigger and less transparent and now non-performing investment packages along with credit default swaps have lit the light of realization for many. The word needs to remain in the science arena and those in finance need to call it debt. After all, you can’t be up to eyeballs in leverage. ;-)
Debt and leverage are 2 very different things. Leverage is a form of debt, but it’s asset backed. Debt is debt. A personal loan is pure debt. A mortgage is a form of leverage.
I agree, you can’t spin debt out forever. But alot of people tried. And now they are reaping the rewards….
Exactly… what is the point of saving the $$$’s…
Right now I have no reason to be saving… other then avoiding debt blah blah…
But I also don’t have reason to spend much.
So I treat it as a game lol… kinda entertaining…
When I first started working, I couldn’t get (nor did I want) a credit card. So I saved to get the things I wanted (a desktop cost $1,500 back then for a 468k RAM). It’s always better to save than to use credit, and I still utilize this concept today, even though I have credit.
Saving is about more than just avoiding debt. It’s about having an emergency fund, it’s about planning for large purchases, it’s about having a little cash when you need it….and it’s also about building an asset base.
Sometimes things that don’t make sense make alot more than you realize when the time comes and you review history.
Well, the thing is right now i’m in grad school, so to me what little I save doesn’t matter much.
Also, housing costs are insanely expensive in the bay, so there’s no way i’ll be making that kind of investment anytime soon.
My major expenses are food entertainment, school. I can’t skimp on school =), and I already mostly cook… so entertainment? Let’s let me have fun!
Otherwise the only thing I have to worry about is traveling back home (and I can always beg my parents to foot the bill…)
My point is there isn’t anything in particular I’m saving on. No real short, mid-term goal. So just save b/c it’s responsible (builds character lol?) and for kicks. Maybe in a few years…
My short term savings goals are to save enough for a down payment on a house construction, probably within 5 years. Even shorter goals are things like yearly vacations, new smartphone every few years, and other somewhat large expenses I can predict. I prefer to wait and save rather than buy on credit and pay off. My long term savings goals are to be able to retire at 55, living only off my asset income, and be able to afford to rent rooms anywhere in the world. I’d like to be able to spend a few months at a time in various European countries *cough*Italy*cough*, but to do that, I have to have enough to make $3,200 a month in interest/dividends. My savings goal of a few mil $$$ is based on that.
That is such a great question and you answered it very well. Just the other day my wife was worried about spending some money on something that was completely necessary and I had to tell her to focus on the big picture. Positivity is huge as well. Way to go
Why do I save? I don’t (well sort of) – but in my past life as an employee – I saved for this thing called retirement. I’m neither rich nor poor and looking back I see only two redeeming qualities (moneywise). I saved a moderate amount of my income and I’ve always feared debt. Your reasons for savings are great – keep at it. My kids will probably get the foundation assets, my wife and I will volunteer now and again and we hope to live out our lives without being a burden on anyone – but save – no way!
why save?
http://www.rgemonitor.com/globalmacro-monitor/256318/thoughts_on_the_bear_market_rally
Wealth destruction in our home values and investments mean that if you’re NOT saving, you’re going to be behind the 8 ball.
To us, building assets has more to do with long-term security than anything else. We want to cover our basic needs, be comfortable, and have some left over to enjoy and to travel. Not knowing how much “basic needs” will cost in the future makes it hard to know how much to save. I think that fact alone is what sometimes makes me feel insecure, even when we do the best we can to save. But like anything else in life, this numbers game is about balance — providing what we need for today, and saving for short-, medium-, and long-term goals.
“Not knowing how much ‘basic needs’ will cost in the future makes it hard to know how much to save.”
That sums it up perfectly, and is the reason I think we should save as much as we can.
I hope we can help improve the world through the Yakezie Scholarship vertical. It may be tough, as it will require us to find people who have the initiative to help themselves by submitting an essay, but we shall see!
I recently wrote a post called “If life is the currency, I’m already rich.” In it I explained why I wasn’t rushing to find a 9-to-5 job after huge midlife changes (divorce, moving, obtaining a college degree) but rather remaining a freelance writer.
I’m not advocating fiscal irresponsibility. I have some retirement monies and a small pension from my previous job and am funding a Roth IRA. I have an emergency fund. I live very frugally so that I can spend where I *want* to spend, e.g., travel.
For now this life works for me. If it stops working, I’ll try something else.
Here’s the link to the post, if that’s OK:
http://www.donnafreedman.com/2010/09/16/if-life-is-the-currency-im-already-rich/