As a regular part of my practice I discourage my clients from having savings accounts. This may seem odd, and the reason for this statement was mainly to get your attention. While it is true I don’t think very much of savings accounts, I do think that savings are very important. Savings are the cornerstone of any financial plan. Saving may not be fun or sexy, but it should be viewed as the permission slip that allows you to hold some riskier investments. Whether you want to be prudent, like to have some green around you can touch, or believe in Murphy’s Law, savings is the way to go.
Savings can come in all different shapes and colors: a savings account (the second least effective method), short term CDs, money market accounts, or even good old cash under the mattress (the least effective against inflation, or robbery; most effective against a bank run). Whether you earmark this money for a rainy day, fixing something major that will break at the worst time, or even bailing someone out (that may be a jail reference depending on your family), you need savings. It always comes in handy and can be useful in so many ways.
Okay, time for me to play devil’s advocate. I have heard many times that savings just sit there doing nothing and is being wasted. It could be invested or used to pay down some debt. I am not advocating having a ridiculous amount in savings - rather a prudent, sensible amount. Old rule of thumb was 6-12 months’ worth of living expenses. In the good old days of the Market Mania, people chopped that down to 6, then 3, then even 1 months worth of savings. Not wise. Maybe I am too old for my age or conservative, but I say at least 3 months’ worth of living expenses should be in savings. That is a starting point and you should work towards six months. Now back to my original thought. All those people who said the savings could be used to invest…I have to ask how their investments are doing right now. I bet having some savings would make them feel better and help support their investment choices. As for paying down debt, that is a good one. I only caution if you pay the debt down, please keep it down and don’t run it up again. If you do run it up, then you are creating a hamster on a wheel cycle and that credit that was available is now tied up when an emergency happens.
To address my earlier notion expressed by many about savings just sitting there. You are correct, it does just sit there. But that is its job…and it does it well. It sits there waiting, willing, and able to help when you need it. One of the worst feelings is when a great opportunity presents itself, and you cannot take advantage of it for lack of preparedness. This money helps to eliminate that. Whatever you need the money for, and you can keep that to yourself, it is there. Whether it’s for a new business, an investment or to help out someone you care about, it doesn’t matter. When, not if, you need this money, it is there in savings waiting to go to work for you. Just think on that for a while the next time you are doing your budget or thinking of better ways to use your money.
