Save it or spend it?

Assume John Doe is a sales associate.  He worked so hard this year, and far exceeded his sales quota.  His employer was happy, liked to keep him, and gave him a nice year-end bonus of $4000.  John rushed out at 5 PM, couldn’t wait to go home and share this exciting news with his family.  After lots of laughter and hugs at home, he had to decide:  “What am I going to with the money?”

To many people, the money they have is limited.  I’m one of them.  Every day, they are facing the dilemma:  save it or spend it?  Part of the brain may whisper: save it, while the other part may shout louder: spend it, right now!  The choice is totally up to each individual.  People make the money decision, right or wrong, and face the consequences.

According to GOBankingRates, 57% of Americans have less than $1000 in a savings account, and 39% have saved $0.  This survey seems having focused on savings account only.  Some people may not like savings account, and prefer putting the money into checking account, money market account, CDs, or investing into stocks/mutual funds, real estate or other business.

The numbers in the survey may not show a clear picture, but the message is still valid:  on average, Americans have not saved enough.  Much more needs to be done, and change has to start from today.

Why save?

Making money is hard.  You worked five days a week.  Spent long hours on the road and in the office, away from your comfortable home.  Finally got that paycheck after deducting the endless taxes.  Did the paycheck come easy?  No.  Then you got to manage your money, and make good use of it.

Saving money is not much fun.  It is a lot of hard work and requires discipline.  But it needs to be done in order to take care of ourselves and the loved ones.

  • Protect yourself in emergent situations

Each of us hopes for the best every day, but has to prepare for the worst.

What happens if your roof is leaking, and needs to be replaced tomorrow?  It needs thousands of dollars saved in order to get a new roof.

Your furnace is 18 years old, and breaks down during the night, when the outside temperature is 15°F.  It needs a couple of thousand dollars to have a furnace.  You can’t wait, can you?

This what-if-something-goes-wrong list could go on and on, about your job, family’s health, car, washer/dryer, refrigerator, dish washer, etc.  Hate to see unexpected and bad things happen.  But it happens, and catches people off guard.  It already caused a lot of stress.  The last thing you wanted to worry about is money.  Saving money is to make sure you and your family is being protected financially, and is having the peace of mind.

Here comes the Rainy Day Fund, or nicely named Emergency Fund.  Saving for emergency is not just about money.  It shows that you care and love yourself and your family very much.

As parents, we know that, the kids may not listen to you sometimes, but always watch and follow what you do.  If parents save daily, kids will probably learn and do the same naturally when growing up.  That would be a great gift from parents to the kids.

Saving for emergency is the right thing to do.  How much needs to be saved?  Some say 3-6 months of expenses, and Suze Orman suggests at least 8-12 month expenses.  Don’t sweat about the exact numbers.  Each individual is different, and there is no universal standard.  You know your family the best.  Just figure out the ballpark, and start:  save, save, and save.  You’ll get there eventually, and will be very proud of what you have achieved.

  • Save for your retirement

You might say: “I’m going to work till the last day of my life”.  It’s great you like what you do at work, or at least don’t mind working.  Sometimes people don’t have other options but to retire.  It could be because of health issues, company relocation/shuffling/downsizing.

Many of us have to face the reality of retirement, voluntarily or involuntarily.  Betting solely on Social Security in US is like shooting in the dark.  There are so many variables that are simply beyond our control.  But one thing is for sure:  we’ll need money in order to have a good retirement life.

It’s hard to put saving for retirement as the top priority, no matter what stage our life is at.  Things always pop up that needs money immediately:  buying the first house, getting a car, having kids, etc.  But saving for retirement is very important, and nobody can or will do it for you.  You have to do it early, and keep saving and investing continuously.  It is a long journey.  I did it, so can you.

  • Send your kids to college

College is not cheap.  As time goes on, it’s getting more and more expensive, even for public schools.  Every parent loves his/her kids, and wants the kids to get good education.  A college degree helps kids to find a good-pay job and expand the career horizon.

As a parent, it would be nice (sure it’s not a duty) to save for kids’ college.  This would ease kids on the student loans.  The kids could borrow less, and pay off the loan faster after graduation.  If you plan to do so, you may not want to wait till the kid is a junior or senior of high school.  Start early, save money for the college, and let the money grow over time.

Save versus Spend:

Obviously, if you have spent $10, it means that $10 is out of your pocket, and is gone forever.  If you have saved that $10, the money could grow over time for you, if invested properly.

Save and Spend are not totally contradictory.  The purpose of saving now is to give you the chance to be able to spend later, when you really need it.  The short-term pain will bring in the long-term gain, and is worth the effort.

I’m not against spending.  The key is to watch what the money is spent on.  Spend consciously.  Is it something I just want, or something I really need?

I need a cell phone for sure.  Two years ago, finally I switched to a smart phone, after my old flip phone died (I used it for 8 years).  I’m probably one of the few who don’t follow the trend.  My smart phone cost $30 in 2015, and I’m happy about what I got.  Do I want to spend hundreds of dollars to get the latest model?  No.  I don’t feel awkward or embarrassed for using a $30 phone.  It’s just a phone to me.  I don’t care how others judge me, as that’s their problem.  I care about what matters to me the most.

Back to the story about John Doe at the beginning, he just got $4000 bonus, and let’s assume this is after-tax.  Poor John, probably his sales quota for next year will be raised by 35%.  Lucky John, $4000 is a decent bonus.  What should he do with the money?  I suggest he set aside $400, talk to his spouse and family, and decide how they want to enjoy this $400.  For the rest $3600?  Save and invest it for the long term.

What’s your suggestion to John?  Please don’t tell him to get an iPhone X, please …

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4 Responses

  1. I’m a big fan of your method: save 90% of it, but go wild with 10%. If you want to spend it all on something frivolous, then so be it – but that 90% will stay safe.

    That’s pretty much our plan any time we get any sort of windfall at all.

    • Retire Early Helen says:

      Thank you, Dave. It’s sweet to get a windfall. Doing some prudent planning before touching the money helps in the long run, and reduces the chance of regret.

  2. I can’t believe 57% of Americans have less than $1,000 in savings…that number is mind-boggling. I love your idea of spending 10% and saving the rest. That’s essentially how I handle all my windfalls as well, although in some cases I try to save 100% of it haha 🙂

    • Retire Early Helen says:

      Zach,
      Yeah, that’s why those cashing advance places or pawn shops still have good business. Some people even don’t have cash for a dryer. Saving is the key to take care of ourselves financially. It’s great to hear that, in some cases, you try to save 100% of the windfalls. That’s not easy, and not everyone can do that.

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