Saving Up Is A Myth

Posted on 08. Jan, 2011 by mike in Saving Money

Quick story:  About a week back I was on the phone talking with my aunt about how I really wanted to visit her, but was still saving up my money for a plane ticket and for lift tickets (she lives close to the Rockies).  At the time that sounded perfectly normal, but once I got off the phone I realized that I have nothing to save for.  I already have more than enough to get a plane ticket and fly out but I still told her I needed to save up.  I didn’t forget about that money but I chose not to say anything because that is the money I have saved.

Saving up is not truly saving

Technically yes, saving up is just a way to say saving but I have notice a common theme among teens.  They (myself included) seem to have differentiated saving up from just plain saving.  When you save up, you aren’t truly saving.  Generally you already have a product or service in mind that you don’t have enough money to pay for.  So the answer is usually to save up.  On the other hand when you save your money it is usually just that… saving it!  As in not planning to spend it on anything unless you have to.  I think having “save” in the phrase “saving up” is misleading so from now on I will call it “reserving”.  Knowing the difference between these two phrases is key to building wealth.

Don’t get these phrases mixed up

Mixing up these two phrases may seem like a harmless mistake but may really hurt you down the road.  If you are even a bit interested in personal finance, you probably know that most of the finance gurus recommend  saving at least 15% of your income.  If you have mistaken saving your money for reserving, later on in life you may be under the illusion that you are financially secure.  After all you saved up 15% of your income just like David Bach or who ever you follow said.  The only problem is that all the money you reserved was spent on the things you were reserving it for long ago.  The money you saved for all that time won’t help you if you don’t have any left.

What the gurus mean

So if I am telling you that saving up will not make you financially secure, why do the gurus say it will?  When they say “save” they are not talking about reserving like so many people seem to think.  They mean exactly what they say, DO NOT INTERPRET IT (sorry for yelling) Saving should be an ongoing process i.e. you continuously add money to your retirement account for decades.  Saving 15% or more of your income is not going to help you if you are putting it towards your “luxury car account” that is not saving money that is reserving it (for your luxury car).

Reserving money isn’t bad

By all means save up for whatever you want, it isn’t a poor decision.  Just make sure that you keep your reserving accounts separate from retirement accounts, college accounts etc.  The money you add to these “saving up” accounts should be in addition to the 15% you save for important things like college and retirement.

What to save your money for

The money that you save should go to important things but what exactly does that mean?  Financial gurus would recommend that the average person should put their money into retirement accounts, but you aren’t an average person.  You are younger than the average person, and unlike most people you are actively seeking knowledge on business related topics.  This means you are in a different situation than the “average person” a better situation. With that said I don’t recommend you invest in your retirement for several reasons…

• Retirement is so far away
• Very little motivation for such a long-term goal
• No access to the money before retirement
• I’m not even sure if kids can have retirement accounts without being self-employed or employed by a company
• Some accounts limit  investment choices
• So much can happen in 40-50 years
• Other important/expensive things will surely pop up before retirement is an issue

I’ll be honest, I don’t have any money saved for retirement and not to sound arrogant but I’m very good with my money.  Instead of saving for retirement, I save my money in three places…

1. My investment account, where I invest mainly in stocks
2. College accounts, which are just a couple of CDs
3. Investing in myself, as in my businesses

These three areas are the most important places to invest in (for now anyway).  I recommend you also invest your money in similar areas.  Even if you only have enough to invest in just one area it is still better than nothing.

Why these areas are the most important

I strongly urge everyone to go to college, although I am not yet in high school, never mind college, I still feel it is very important.  From what I’ve seen college really can open new doors.  Unfortunately, college is not only important, it is also expensive and if your parents aren’t going to help you out, expect a lot of student loans on your shoulders.  I don’t know about you but student loans don’t sound fun at all, and I would really like to eliminate as much debt as I possibly can.

Investing in yourself is only important if you have something to invest in.  If you don’t plan on starting a business this doesn’t apply to you.  Investing in yourself can not only provide you with a great return on investment, it also gives you experience for when you are older and are starting even bigger companies or you could just put it down on your resume.

Investing in the market is a great way to get acquainted with the intricacies of the market.  You will learn how stocks work and you will have a motive for learning more about investing.  It’s a great way to try out different investment vehicles and strategies without worrying about losing massive sums of money.  If you have been investing since you were a teen then when the time comes to manage your retirement accounts you will be well prepared.

Tags: certificate of deposit, college, investing, saving money, saving up