We all have a bank account somewhere labelled “savings”. It’s where we put our leftover money that we haven’t quite worked out how to spend yet – but should it be this way?
To get ahead in your finances, to achieve financial independence you need to be living within your means and investing as much as you can. These investments grow over time and reduce your dependency on a job or a wage for survival. The challenge for a lot of us is that without clearly defined goals, we tend to save for a while and then blow it all on a trip to South America, a new car or some other amazing purchase.
I call this ‘eating all the chocolates’.
Redefining the savings account
In my experience I’ve seen that there are three kinds of money that people put into their “savings” account. The first I call “delayed spending money”. This is the money that is actually not for saving at all, it’s just for spending later when enough has been accumulated for the big ticket item. There’s absolutely nothing wrong with this and I’m currently using a savings account just like this to fund my trip to New Zealand.
The second kind of money people put in their “savings” account is their “wealth building money”. This money has one purpose, to build wealth over the long term. It starts in a bank account, makes it’s way to an investment of some kind and never looks back. It repays you with dividends, rental income and capital growth. This money begins your journey to getting ahead and living free from money worry.
The third kind of money people put in their “savings” account is the rainy day fund. This is money that is genuinely saved with no intention to spend it unless a rainy day comes along.
Why it matters
The way you view money is important. Calling an account “savings” doesn’t define what the money is actually for. By distinguishing money that is for delayed spending, money that is for wealth building and money that is for a rainy day I know exactly where I’m at, what I’ve got and how I’m using that money. Splitting my money up into clearly defined purposes stops me eating all the chocolates, and makes sure there’s plenty to go around.
How I do it
Whenever I’m saving so I can spend, like my NZ trip, I’m choose to dollar-match with my wealth building fund. For every dollar that goes in to my NZ fund, a dollar goes into my wealth-building fund. This gives me motivation to save hard and it means that when I get back from NZ and the other globetrotting I want to do, I’ve still got a wealth-building fund that has continued to tick away, pay dividends and achieve capital growth.