What are you saving for right now?

There are so many things to save for!  How do you prioritize, and how do you save for all of these different things?  If you want to live a debt-free lifestyle, you have to save for no less than the following (in no particular order):

– Emergencies
– Replacement car
– New furniture
– Retirement
– A down payment for your home
– Your family vacation
– Your kids’ college
– That thing you want to do one day
– Annual payments like insurance and taxes
– And much more!

The first lesson I heard from Dave Ramsey, over 7 years ago, was called “Super Savers,” and it outlined three things we save for:

1) Emergencies
2) Long-term goals like Retirement and College
3) Large Purchases

This lesson also referenced one of my favorite verses that explains why we save, Proverbs 21:20:

In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.

So where do you store all this money that you’re saving?  Where do you house it?  Do you settle for crummy interest rates that the bank will give you, or do you look for something bigger and better?

Let’s define our terms.  I’ll use “long-term” for saving for anything more than five years away, and generally refer to this activity as “investing.”  I’ll use “short-term” if you need the money in less than five years, and refer to this activity as “saving.”  We’ll look at why five years is a threshold for saving in a moment.

For short-term savings, your best options are going to be (admittedly crappy) money-market accounts.  Even the best of these accounts pay no more than 1%/year, meaning you’d earn about $10 per $1000 in the account.  Yeah, not fun.  You can open one at a local credit union or online that may do a bit better than a big bank, but only by a few fractions of a percentage point.

Why settle for these crappy returns?  Because it’s stable.  The money won’t fluctuate; it won’t rise and fall with the market; it will be right there when you need it.  You don’t know when an emergency is going to hit – you may need the money tomorrow!  (If you know of a great super-secret savings option, leave it in the comments!)

Yes, I realize that means for most people keeping $10,000-30,000 (a fully-funded emergency fund of 3-6 months of expenses) in an account with very little return!  While that hurts a little, you have to keep in mind: Your emergency fund isn’t an investment; it’s a form of insurance that protects you when bad stuff happens.

Furthermore, for large purchases that will be made in the short-term (cars, furniture, vacations, home down-payments, etc), it’s best to keep these in a stable money-market as well, so the money is there when you need to pull the trigger.

Retirement and college planning occupy most people’s minds when thinking about long-term savings.  These expenditures, being more than five years away, are perfect for investing.  When we invest/save for retirement and college, we can use solid equity (stock) mutual funds with long track records, because we have time on our side.

We don’t use investment vehicles in the short-term because they can fluctuate up and down in value.  They have a great long-term growth potential, but they are more volatile, so you don’t want your emergency fund in mutual funds.  Likewise, you don’t want your down payment for your home in a mutual fund, because it might be worth less at the exact point you need to pull it out.

If you leave money in a solid mutual fund for more than five years, historical returns have shown that you have a much higher likelihood of growing your money, and that likelihood only increases with the more time you leave the money there.  The bottom line is that you need lots of time to invest, making it great for long-term saving, and not so great for short-term savings.

In my next post I’ll talk about places that aren’t great places to save money

Question: Where do you save money now?