Spending and Saving

Spending:

What is a simple definition of spending?

Spending is the action of trading money or time for goods and services.

Different types of spending:

Consumer spending: How much money individuals spend on goods and services
Government spending: Services the government pays for; such as healthcare, education, police protection, public works, and more.
Spending Time: This is time one spends on activities, which can include recreational activities and working

For this lesson, we will particularly focus on consumer spending, and how this affects one's daily life. Here are the pros and cons of consumer spending.

Pro Effects to Spending

Con Effects to Spending

Spending money can bring immediate joy
When you spend money, you are able to acquire goods and services at that moment
Increase in consumer spending can increase/sustain economic growth

Reckless spending can create debt
Spending too much in the present can cause the economy to be in a state of danger due to a lack of saving/investment

Saving:

What is saving?

Saving refers to the action of putting aside money from one's income; or in other words, money not spent.

Different types of saving:

Emergency Fund: This fund means exactly what it sounds like. A fund for emergencies. This is sort of the "just in case" type of fund. If there ever comes an unexpected circumstance such as an earthquake, in which you must make reparations to your house, the emergency fund is the best way to repair these damages in one's life.
Long-term savings: long-term saving allows you to save money over a long-period of time for something(s) you may not need for years, or even decades. This can include retirement, saving up for a house, saving money for college, and more.
Saving for a goal: This form of saving is directed towards specific wants a person may have. This could include a new computer you may want, or a car, which this type of saving will help you save for. This form of saving is intended for something you would like to have
"Before-hand Saving": This saving is designed to pay for things you already plan on getting and have specifically put away money for. For example, this can include birthday money, in which you are prepared to give someone a certain amount of money for their birthday. This is different from long-term saving because it is designed towards specific goals you are aiming to save up for.

Saving can prepare one for their future without having them worry about their financial life
Saving money provides a sense of security and well-being

Too much saving and a lack of spending can hinder economic growth creating a collapsing economy

How much money should you put into each type of saving?

Con Effects to Saving

Pro Effects to Saving

Simple Answer: You can determine how much money to allocate to savings using the following budget rules.

Complex Answer:

Emergency Fund: An emergency fund should cover 3-9 months of essential expense (needs). For example, if you spend 2000 dollars on needs for 4 months, you may want to save around this much money. You can start by saving 20 dollars per week, per se, and achieve this value in your emergency fund after 100 days, or around 14 weeks. Keep in mind that an emergency fund isn't necessary until you become an adult.
Long-term Saving (retirement): You should save around 10-15% of your paycheck towards retirement
Saving for a goal/"Before-hand saving": These two categories of saving can be combined into one category of things that aren't of much importance. Still you shouldn't ignore it. For this category, you should save a certain amount of money monthly. For example, if you are saving for that awesome jet ski (that you always wanted) that costs 7,000 dollars, and want to save and eventually purchase it in 5 years, you will have to save ~116 dollars/mo. To calculate this number, you can use this formula:
(Cost of object) ÷ (12 months) ÷ (Number of years)

Making Decisions:

When you spend, you are saving time to enjoy certain pleasures. When you save, you are sacrificing this time to typically purchase something of more value and importance. Sometimes you need to choose between spending your money now, or saving it for later. The decision you make is based on YOUR priorities.

Ex: You walk past an ice cream shop, and are craving a delicious scoop of cookies and creams ice cream. However, you are currently saving for a new computer that is of much more value. You think to yourself, "is paying for this worth being setback from achieving my ultimate goal of paying for this new computer?" By understanding your priorities over needless spending, you understand that it is smarter to save your money.

Delicious, cheap, unnecessary, and is a short-term desire

Useful, Expensive, Long-lasting, and necessary

Takeaways:

It is important to have a good balance between spending and saving, since you have seen how excessive spending/saving can lead to financial problems.
It's important to understand the differences between the different types of saving, and be able to organize money for them accordingly. Even if you are a kid, and aren't ready for a savings account, you can always save your money in a piggy bank, coin jar, or a wallet!
Make sure to especially understand the difference between your emergency fund (which is very crucial) and your less important savings such as your "Before-Hand Saving." We will explore more complicated methods of saving including money market funds, bonds, and savings accounts in following lessons.
Don't feel pressured to having to stick to saving and spending specific amounts of money. Do what feels good for you!