It Really Is All in the Same Bucket
While it may make sense to look at our savings from a time-based perspective, the short-term stuff, things that we’re saving up for the medium term, and our long-term savings, we really shouldn’t be compartmentalizing too much here because we then may risk missing out on the big picture, and it’s all really about the big picture.
Both are important actually, how much we have for certain things and how much we have overall. Should we fall short in one of our baskets though, we’ll have to make up for the shortfall, and sometimes this involves reproportioning our savings to rebalance them.
If we have a crisis arise where we unexpectedly incur some major expenses and have to deplete our overall savings significantly, we very well may not have set aside enough money in this compartment to handle it, and we will then need to save more for the compartments that we had to dip into prematurely.
This may involve a re-assessment of the objectives of the other compartments, and we may for instance not be able to retire as soon as we wanted to if we’re not able to make up the difference. We can’t just save all of our money for retirement at this stage as we still need to replenish the money we took out of the other compartments, and if we’re not able to make up for the shortfall, this can create the need to change our plans at least somewhat.
We therefore need to start with the total amount of our savings and then take that amount and proportion it, which can end up being a pretty dynamic process should events arise that cause us to need to change our overall plans. We do need a plan but we do need to be also aware that it is based upon what we know now, and this is certainly subject to change as the journey progresses.
The Real Goal is to Seek Out Balance
With any savings plan, whether it be long or short term, what we’re looking to do is to balance out our income to be able to handle spending that is not so constant and predictable. Our income tends to be, but we really don’t know for sure what we will need to spend along the way.
With many things though, we can plan for them, and the better we plan, the better off we will end up. Crafting a plan to take us through the rest of our lives doesn’t tend to happen all by itself, for most people anyway, those who aren’t so wealthy that they do need to pay close attention to how they are doing and how they may end up if they do not make deliberate decisions to seek to help themselves financially.
In retirement, this is fairly easy to do, at least as far as our everyday expenses in retirement will be. If our income will be reduced by a third and our expenses go down by 10%, these are some numbers that are pretty easy to work with and we then will need to make sure that we are deferring enough income to down the road.
We also need to account for expected returns on our money, as well as advantages present in our retirement accounts, such as saving on tax or having our employer contribute to our retirement plan as well.
This all is far from exacting and we will have to be making some reasonable guesses here, and therefore it is important that we err on the side of caution given how much is at stake here. This is especially true with those whose retirement is decades away and will retire at a time where government benefits such as social security may be in question, where this will need to be calculated in as well.
Shorter-term savings needs also need to be seeking out a balance of income, which happens automatically whenever we buy on credit. The payments balance out and spread the cost over a period of years usually, and we need to do the same thing with our savings, looking to smooth out the spending spikes by allocating income to these more occasional needs.
Long-Term Savings is All About Looking to Control Spending
The task here is really all about looking to smooth our income as much as possible, and it’s simply better to do this with our own money rather than relying on credit and paying a premium to make up for our lack of planning.
Many people will use the excuse of they don’t have the money when something comes up that they need to spend a fair bit of money on, and if you don’t have it then it’s not that you can go back in time and change your ways and plan better, but when we look forward, this is something that may indeed be possible.
We also want to avoid thinking that if we cannot accomplish our savings objectives fully, the task then becomes futile, and this may affect our motivation in a harmful way. If someone is contemplating retirement for instance, and feels that due to past circumstances of lack of attention they have failed miserably to provide themselves with the means to retire comfortably, this should be an indication that we have to try harder, not less.
We may not be as willing to redouble our efforts in this case and may continue to make the same mistakes that led us to this situation, spending more than we should and not saving as much as we should, and maybe even become depressed about the whole situation and make things worse by spending even more.
The biggest threat to our long-term savings plans isn’t so much a lack of effort but a lack of perspective. It can be very tempting to live beyond what should be our means if we don’t realize what the real limits to our means should be. The real limits do not include not saving enough or spending too much and having ourselves pay the price for our mistakes later.
We certainly are well conditioned as a society to spend it up and companies spend hundreds of billions each year looking to further and even increase this conditioning. Our very beliefs may be deeply embedded in this culture of spending and there may be a lot of things which are highly discretionary that we view as necessary and even essential.
What this attitude serves to do is to take the focus off of the future and put too much weight on the present, on instant or near-term gratification, but time does move on and these future periods in our lives eventually arrive. We need to be ready enough for these times as well.
One of the biggest obstacles to long-term savings though is thinking that this period is so far off that it doesn’t matter so much. We especially may think that we have plenty of time later in life to worry about these things, perhaps at a time when our income is higher, but there’s nothing that will dash our long-term plans quite like turning this long-term into a much shorter period.
If we’re in our 20’s for instance, retirement is decades away, and we might think that we can be more liberal during this period of our lives, but income not set aside now for the long-term will have to be made up for later, and we will need to put in quite a bit more later due to not just the nominal amounts that weren’t saved but the returns as well.
Younger people who see charts and tables of how long-term savings accumulate tend to be pretty amazed by how much more value there is in starting young. Most people don’t get exposed enough to this sort of thinking or may simply not put the weight on this that it deserves though.
The time to learn this is not in middle age or especially in the final few years of one’s working life where the reality of their lack of preparation finally comes home to roost. We tend to care about retirement more each year as we approach it, but ideally, we need to come to this understanding earlier in our careers and at the outset preferably.
Long-term savings, for the majority of people, should matter a lot, and we may even say that there is no more important use of our income than to provide us the means to avoid drastic shortfalls in retirement. A lot of elderly people barely survive on their incomes with no real savings, and after working for so many years, we deserve better. We need to care enough though to merit deserving this.