Monday, 11 June 2007

What are you really saving for?

When I think about personal finance, I always come back to one of the corner stones, savings. But what are we really saving for? Sometimes, it is much easier to kick start a savings plan and keep it going if the motivation of it is strong. I have my top 5 reasons for savings.

  1. An emergency fund - This has to be the number one reason for starting to save. The emergency fund is used for servicing the unexpected, some would view the emergency fund as an insurance policy funded and managed by you. An emergency could be as simple as having to do an unexpected major house repair work or medical bills for your kid's broken leg. It is harder to decide when the emergency fund has enough money in it so that we can start to concentrate on saving for other things. However, the emergency fund is one that requires regular review to ensure that it's level is adequate as your situation changes.
  2. Retirement - You are only able to work for so long until your body or mind gives up on being income bearing, so you will need to save for the day when you stop working. For many of us that would be in our 60s, some may be fortunate enough to retire in their 50s. Saving for your retirement could be as simple as contributing extra into your Superannuation. Relying on the government pension for your retirement is probably not a good idea if you wish to sustain a similar level of lifestyle as you have now. Saving for your retirement is going to be one of your longer saving plans, and would be easy to just set and forget. This would be a mistake. As this plan is long term, the compounding effect of various investments could be exploited. For me, retirement is not viewed as retirement for myself, retirement is setting up for me and my wife, and also to lessen the financial burden of the parents on their kids.
  3. Your kids - Your kids are totally dependent on you for their future. It makes sense to give them every opportunity and the best opportunity possible. Without a decent saving plan for your kids, it makes it difficult to provide them with these opportunities. I wrote a review of the book "How to give your kids $1 million each" that specifically deals with this topic.
  4. Family - Among other obvious disadvantages, it is not a good living for your family if you don't give them confidence that you can provide for them. By showing that you are able to save, it provides them with a sense of security and a solid foundation to build a family. This is very different to saving for your kids. Saving for your family would also include your extended family such as your siblings, parents and in-laws.
  5. Good character building - To establish a regular saving habit takes strong discipline, and once this good habit has been acquired, it will have a positive affect on your whole character. It shows that you can follow a plan through, exercise good control of your will. The other side effect is that your kids will follow your example of saving money and pick this habit as well.
These are strong motivation for starting and maintaining a savings plan. What are some of yours?

3 comments:

Canadian said...

Down payment for a house

Fabulously Broke in the City said...

Getting rid of debt so I can sleep soundly at night instead of having to scrimp (just started, slowly getting used to it)..

And finally being able to own a house. I am taking 50 THOUSAND pictures when I finally get to that stage in life.

tehnyit said...

@fab,

taking 50 thousand photos sounds like a fun project. I always wanted to do one of the a photo a day project.

Owning a house is certainly worth celebrating. Good luck!