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

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

Adequate Spending

Excessive 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 towards your house, the emergency fund is the best way to repair the damages
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
Spending some money on your leisure can motivate you and your money management

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

Excessive Saving

Adequate Saving

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

Detailed 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 2000 dollars in this period of time. You can start by saving 20 dollars per week, per se, and achieve this value in your emergency fund after 100 days, or about 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 fun goal!: 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 one awesome jet ski that costs 7,000 dollars, and want to save and eventually purchase it in 5 years, you will need to save around 116 dollars/mo. To calculate this quantity, you can use this formula:
(Cost of object) ÷ (12 months) ÷ (Number of years)

Making Decisions:

When you spend, you are saving time to enjoy 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

Retirement Saving

401k: A 401k is a savings plan for retirement. Basically, a 401k, offered by employers to employees, takes a percentage of the employee's income and saves it in the their retirement plan.

Roth vs. Traditional 401k: A Roth 401k is funded with after-tax, while a traditional is not. This means that with a traditional, you cannot withdraw any money from a 401k without paying tax, unlike the Roth 401k.

IRA: IRAs are also savings accounts for retirement. They generally have the same rules as 401k involving withdrawal rules, tax-advantages (for Traditional vs. Roth), and a wide selection of accounts you can choose from.

Roth IRA, Traditional IRA, and Sep IRA: Contributions to both Traditional IRAs and Roth are limited to around 5500 dollars a year. Sometimes, you can even be disallowed to contribute money if you generate high income. Sep IRAs are IRAs that allow you to contribute more money than a traditional or Roth (applicable if you are a business owner or freelancer).

Pension: Pension is another retirement plan that is established by an employer, unlike an IRA and a 401k. The employer presets a contribution for every month for your years of retirement. There are many pros and cons to this, as you do not need to worry about sorting a percentage of money yourself, but this lack of control isn't always beneficial. For example, your pension can handed over by your employer if you quit a job, and prioritization of your pension is in complete control of your employer.

Saving for College!

Consider that cost for a public college out of state is about 32,000 dollars for four years. It is best to begin saving for college when your child is born. Assuming that your child will go to college at 18 years old, you will have 216 months to save 32,000 dollars. You can simply divide the cost for college by the months you have until your child is going to college. You will determine that you will need to save around 150 dollars per month for 216 months.

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 and or a lack of motivation.
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!