In my mind, there are basically two types of savings:
- Savings for immediate threats, like your water heater breaking, or a quick trip out of town when a relative is sick. This is often called the emergency fund.
- Savings for other short-term and long-term goals, investments, retirement funds, and everything else that plans for future spending.
This post is not about the first kind of savings. I’m a big proponent of the emergency fund and I think it should almost always be funded prior to making any other financial moves.
On the other hand, this post is about the second type of savings–what I would call the “elective” kind.
I can think of five very good instances in which postponing elective savings would be financially beneficial in the long run. Check them out and see if you can help me think of more.
Note that if you are in one of these situations (except maybe #5), the goal is not to sit around and not save money forever–it’s to get out of the situation so you can start saving.
1. Paying Off High-Interest Debt.
This is the most obvious and most often-cited reason for postponing savings, the strategy being that the cost of maintaining high-interest debt often far exceeds the interest that could be earned on savings or investments.
It’s often a psychological issue as well–the “weight” of debt on the financial psyche, even low-interest debt, is strong. Getting rid of it frees up focus and attention for saving and high-impact spending (more on what I mean by that next week).
In a time of economic crisis, many “experts” have suggested that cash is king–that increasing savings is still more important than paying off debt because only cash can pay your bills. Evaluating your own job situation and keeping a healthy balance between the two is important in times like these.
2. Temporary Job Loss.
When that personal crisis hits and income is choked off, it can get almost impossible to save. Depending on whether you’re single (worst), married (better), or part of an extended family (best), the support system and levels of income others can make up for will vary.
Those in the most challenging situations will start eating through their savings (hopefully, there are some!), those mid-way may find their budgets just balancing out, while those who continue to enjoy a fairly adequate income from other sources may still be able to put away quite a bit.
3. Building a Checking Buffer.
Building a checking account buffer is an often overlooked financial step that can save most people hundreds of dollars in overdraft fees every year, and a lot of headache and stress about where you account balance is today.
Don’t believe me? I don’t need to check my account balance for the next month and I know that every bill, every purchase, every transfer will be covered 100%, thanks to my buffer.
While in itself a form of savings, building a buffer has to be a conscious act, because most people’s first instinct is to treat their checking account balance as the money available to spend. It’s not. In fact, once it’s there, it should never go away again.
One way to beat the psychology is to build a buffer in even chunks, whether $100, $500, or $1,000, so you can remind yourself, “Okay, my real balance is $1,000 less than this.” Another method is to use an envelope budget and designate an envelope for the buffer.
4. Improving Insurance Coverage.
In the delicate balance between savings and insurance, a case can be made for putting savings on pause if insurance coverage is grossly inadequate to protect you in case of disaster. Now, I’m not talking about silly insurance, but the big ones–health, car, life, homeowner’s/renter’s.
With limited income, you may have to make a choice–putting away discretionary money into a savings account for future spending or emergency use, or using that discretionary money to improve insurance coverage and protect against threats that would eat away at your savings. If you want more thoughts on the subject, you might want to read Saving More vs. Insuring More.
5. Anti-Savings Philosophy.
Let me explain, because this doesn’t work for everything. The two most common areas I see this in are college savings and retirement savings.
If your financial plan is not to pay for your children’s education (whether you believe they should pay their own way, take out loans, etc.), you would obviously not be saving for college. A lot of people are simply against helping their kids in this regard, and letting them figure it out on their own.
Some people also reject the common notion that retirement is a time to stop working and start “having fun.” They either plan to work indefinitely because they love what they do already, or create passive income streams throughout their life to provide them with enough working income at retirement. If this is the case, the need for true retirement savings is greatly diminished.
Can You Think of More?
I’m sure there are many more reasons to avoid saving money but these are the five I think I’ve seen the most. Can you think of any you’ve used or you’ve seen others use in the past?