Personal Finance (Sec. 4)

Fundamentals of Finance by Adam J. McKee

SECTION 4: Saving

This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.

Open Education Resource--Quality Master Source License

Savings without a mission is garbage. Your money needs to work for you, not lie around you.

~Dave Ramsey, The Total Money Makeover


In this section, we will consider the reasons for and methods of putting money away for various purposes.  The most important thing we’ll be considering putting away money for is so that it can grow.  Before we talk about money growing, we need to consider what money is worth.  Most of the time, money loses value every day!  The numbers don’t change, but the price of everything keeps going up.  This isn’t just your mother’s observation about the cost of groceries.  With a few exceptions (consumer electronics keep getting cheaper), prices really do keep going up.  Economists call this process inflation.  They can use some pretty simple math to tell us how bad the problem is.  Uncle Sam (the Bureau of Labor Statistics to be precise) uses similar math to create what is known as the Consumer Price Index (CPI).  The CPI program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.  Geography and the type of stuff that these folks are buying plays a big role, and there are loads of specific statistics on the BLS website.  For our purposes, we’ll note that it is an estimate of inflation and that it averages somewhere around 3.0% per year.  What that means is that each dollar you save is worth three cents less per year, every year (on average).

One of the things you have to consider, then, when you are developing a savings plan is that inflation is a problem and you will lose money if you keep it in the cookie jar.  It gets less and less valuable each day that passes.  It also means that if you want to save anything, you have to earn at least 3% per year just to stay in place and not go backward!  Saving is like running on a treadmill; if you actually want to go somewhere, you have to run faster than the treadmill is moving you backward.  If you stop moving, then it will throw you on the floor.

Smart investing isn’t being greedy.  It is preserving what you worked hard for.  In the sections that follow, we will consider several different aspects of saving.  These are limited, and there are many books written on each.  In this book, I’ve used the terms “saving” and “investing” in a sloppy, interchangeable way that most investment advisors would not condone.  We’ll take a peek under the hood and see how money can grow in a big way under the right conditions.  Then we’ll look into some specific strategies and purposes for saving money.

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