What Are You Saving For?

Four things people don’t always save for, but should.

Saving with a purpose

Ask me if you should save money. The answer is most always yes. Ask me why you should save money. Now we’re talking.

Most families know they should save money. This isn’t a secret. We all know that we should be saving, but we don’t always think about the reasons. That said, you’re probably already familiar with the most common reasons to save. Retirement, education, down payment on a home, and an emergency fund are all worthwhile pursuits. And, while these goals aren’t the only ones worthy of our hard earned money, they are usually enough to keep us convinced that we should be saving.

What I love most about these common goals is that they can be finite. That is, there can be an actual dollar amount you’re aiming for. It’s easy to figure a 20% down payment on a $350,000 home. It’s also easy to figure out 3-6 months worth of expenses for an emergency fund. Also, while retirement and education may be a moving target, you can still estimate how much you might need and plan accordingly. These “finite” dollar amounts aren’t absolute, but they give you a target, or a vector, to get you as close as possible to your desired goals.

Before I go on, if you’re curious about the best place to save, or just where to put your money while you’re deciding, read The Savings Cascade to get a better understanding of how different savings vehicles work.

What else?

Hopefully you’re saving for a few of these goals already. If you aren’t sure, start with an emergency fund (everyone needs one) and make sure you’re starting as early as possible on your retirement savings. After all, while I know it’s hard to imagine, there may come a time in the future when you might not actually love working as much as you do now.

If you’re already dialed in on these two things, I invite you to consider a few other goals that you probably aren’t saving for, but probably should.

The list (in no particular order)

• Home repair, appliances, and HO insurance premiums

  In my family, we call this the “home fund.” There always seems to be needs for the home. Small repairs, a new appliance, gutter cleaning, power washing, a broken couch, and so on. There are nearly limitless ways home maintenance costs can sneak up and bite you when you least expect it. It’s endless and varies wildly. So how to prepare?

  My wife and I decided on 1% of our home value to save as a home fund. Why 1%? A few years ago, we were hit with a nasty hail/wind storm that did quite a bit of damage to our roof and siding. Since the roof and siding were already 20+ years old, neither held up well. Fortunately we were able to file a claim for both items and got everything repaired or replaced. Now, what do you think our deductible was for such a claim? You guessed it, 1% of the home’s insured value. This is a very common deductible for this type of claim.

  If you do some quick math, you’ll know this isn’t a small amount even for an average home. Such an expense can cause quite a bit of pain if you’re not prepared for it. The good news is, if you do have 1% saved in a home fund, not only will you be prepared for a 1% deductible, you’ll also be prepared for most repairs and replacements that arise in the meantime. Appliances, furniture, tree trimming, painting, plumbing repairs, and other irregular maintenance will likely be covered by this amount. Also, you’ll probably be close(r) to affording a new AC unit should it suddenly need replaced. If you do need to tap the fund for an item, go for it. Just don’t forget to fill it back up!

  I should mention this home fund should NOT be used for major planned additions or refurbishments. If you’re planning on adding a deck, a new bedroom, or re-doing your kitchen, you should plan for those improvements separately and keep your home fund for items that are more difficult to plan for.

• Gifts

  This item is often overlooked by most people. Birthdays, Christmas, Mother’s/Father’s Day, and other holidays happen regularly and typically require some sort of gift giving. The good news is that these predictable infrequent costs are easy to plan for if you spend some time on it.

  If you aren’t sure how to plan for these things, take a look at your cash flow over the past year and find all the gifts you spent on others. If you don’t track your cash flow or budget regularly, a budget app like Monarch or YNAB can help you get started. If you don’t track it, you can’t plan it!

  If you’re not sure how much you typically spend, that’s OK. Start brainstorming all the regular occasions and holidays you give gifts on (like those mentioned above). Estimate how much you spend (or how much you want to spend going forward) and budget those amounts in the appropriate months. Once you have all the regular events planned, don’t forget about the irregular ones. Retirements, weddings, graduations, and baby showers are all significant events worthy of a generous gift. Put some thought in to this and set aside what you would spend on one of these events. If you know you’ll have more coming up soon, plan accordingly.

• Car replacement

  Paying off a car loan is an exhilarating feeling. Once your loan is paid off, not only do you own your car free and clear, but your cash flow is suddenly boosted by hundreds of dollars.

  I hope you enjoy it, because I’m here to pop your balloon.

  Unfortunately this feeling doesn’t last forever. Even under the most diligent care, a car’s lifespan is limited. The car-payment-free lifestyle never lasts as long as you hoped. If only there was a way to soften the blow of a car replacement without sacrificing the wonderful feeling of a paid off car…

  Fortunately there is a way, but it requires some discipline. Before I explain, this will require you to shift your thinking about car payments in general.

  • Mental shift 1: stop thinking of your car payment as a payment towards this specific car or loan. You should think about your payments as “the cost of transportation” as my father in law used to say (thank you Cliff).

  • Mental shift 2: consider this “cost of transportation” as a permanent cost. Since you always need transportation, why shouldn’t you always expect to pay for it?

  Armed with this new idea of “permanent cost of transportation”, now you can better manage your car replacement costs. Once you pay off your car loan and you stop making payments to your bank, now it’s time to start saving for the next car. I recommend paying 50% of your prior car payment towards a car replacement savings. This way you still have the wonderful feeling of increased cash flow, but still remain committed to the permanent cost of transportation. Once it’s time to trade in your car, you should have multiple thousands ready to help you with your trade-in.

  A word of warning: don’t allow this practice to tempt you into buying more car than you can afford! Stay within your budget.

• Vacations

  It’s OK, I’ve done it too. I’ve used a credit card for this.

  Years ago during the high cost of early parenthood we decided it was time to take our young kiddos to Disneyworld. Yikes. Not only was I unprepared for every planning item needed to get to the happiest place on earth, I was dismally unprepared to pay the tab when it was over. I was a very good customer for Visa that year.

  Vacations can be a tough one to save for emotionally. This isn’t because they aren’t fun to look forward to, quite the opposite. They’re tough to save for because the cost is all up front. You’re paying the steep tab to your savings account and not enjoying any of the fun or relaxation you deserve in the meantime. It can feel like a grind.

  That said, the feeling of going on a paid off vacation is something I can’t describe. By the next time we went to Disney a few years later, everything was paid for in advance. The room, the tickets were all paid off. We also had money saved up for all the food and souvenirs we wanted to buy. If you can believe it, we even came in under budget and had a little left over. Now that’s a planning win.

  Going on vacation shouldn’t leave you feeling burdened with regret when you get home. Also, a vacation shouldn’t blow past what you can reasonably afford. Not only will saving for a vacation ahead of time prevent you from buyer’s remorse after you return, it will keep you grounded to a reasonable vacation you can achieve. And of course, you’ll be much more relaxed when you’re there.