When people say ‘I’m saving X amount per month…’ what should this include?

[pleasegodprotectme]

Maybe I’m dumb, or can’t wrap my head around it, but when people say this I’m always trying to understand the total amount.
Does a 401(k) really count, because of the age limits for retrieving this money?
Do you include reducing liabilities, like a mortgage payment? Say I put X additional amount into my mortgage, and reduce the pay down time, should that count as monthly savings even though it is not liquid?
How can I think about various accounts, what I should access if I need/want cash for something and how should I consider liquid vs illiquid assets?

 

[newway]

@pleasegodprotectme Saving is any financial activity that moves your money out of operating cash into a longer term holding area.

Thus any movement of money to a savings account, CD, U.S. Treasury products, money market fund, stocks, or bonds - in any type of account (bank, brokerage, IRA, 401(k), etc.) - is savings.

Checking accounts can be included, but they are primarily for imminent transactional use and are not really appropriate for savings. (This should be obvious...)

Investing in something relatively illiquid, like a house or a valuable collectible, is a gray area that some might argue with, but I would not define that as savings.

Paying down debt adjusts the red and black columns on your net worth balance sheet, but is not savings.

 

[pleasegodprotectme]

@newway Thank you! This also helps me clarify understanding, framing my future planning.

 

[rosenco2002]

@pleasegodprotectme A lot to unpack here.

Savings as defined by Webster: the money one has saved, especially through a bank or investment plan.

A 401k is considered an investment plan. Thus, placing money into a 401k is saving.

Paying off debt is not considered saving. By incurring the debt you are automatically charging yourself more for the consumption purchase and not “saving” money. You’re paying for the privilege of spreading your consumption into the future.

The question of going liquid vs illiquid is deeply entwined with the goal and time horizon of the money. A few examples of money that needs to be very liquid: emergency savings, planned purchases within one year, money needed for current savings. You don’t want to be invested in stocks for something less than a year away.
Money that is 5-7 years away from being spent could feasibly be invested partially in the stock market. Money that is 10+ years away from being spent can be almost entirely in the stock market.

Please let me know how I can further help your understanding.

 

[pleasegodprotectme]

@rosenco2002 Thanks a lot, this clarifies my understanding, as it’ll help me assess monthly cash flow, savings to consider long term/short term.
That’s really helpful. I’ve never thought about the terms of time horizon for investment, and home ownership.

 

[rrztop1]

@pleasegodprotectme I don't think that there is any common answer for what you should include in the amount you classify as "savings" each month. And I'm betting if you asked a bunch of people what they think should be included, you'd get a bunch of different answers. But it doesn't really matter anyway. What matters is that you are working toward your financial goals in a way that makes sense to you.

I don't think paying down debt is savings - that's not money in the bank or money in investments. By paying down debt, you are reducing your liabilities. When we are talking about mortgages, when you pay down your mortgage debt, you increase your equity, which increases your overall net worth, but that isn't savings. Some people who want to inflate their savings "number" may include it, but I don't think it should be.

Savings is money that you put away for the future. People should have a 3-9 month emergency fund - liquid or fairly liquid that they can access relatively quickly. A common place to put this money is in a regular savings account - a better place is in a high yield savings account. People should also be saving for retirement - 15% of your salary is a guideline, but you may save more or less, depending on your situation - this could be in a 401K, RothIRA, traditional IRA, Health Savings Account, or in a brokerage account if you've maxed out the tax-advantaged accounts. You may also have other goals to save for - down payment on a house, education, home renovations, a new car, a trip to South America, orthodontia...

 

[pleasegodprotectme]

@rrztop1 Thanks, this also really helps my high level understanding of how to view it

 

[mercylam521]

@pleasegodprotectme We categorize our savings into three categories: short term (

 

[blueberry25]

@pleasegodprotectme "Savings" to me is any money you make that you do not spend. Doesnt matter where it goes. I admittedly take that to an extreme and would even consider home equity (the portion of a mortgage payment that applies to loan principle) to be savings but admit most people wouldnt call it that.

But yeah between that extreme and the other extreme of not considering retirement accounts to be savings (i dont agree with that) then I "save" between 5% and 55% of my income which is a huge range.

So yeah how you define your terms matters.