Not all saving is created equal (hint: you may be surprised)

What saving makes the most difference? Turns out some saving is not saving at all!

The most important saving is money put aside that actually improves your financial situation – now and in the future. It pumps up your financial security and independence. When you’ve got this sorted, you’ll have far fewer worries.

Let’s look at some things masquerading as saving that are not, and zero-in on what matters most.

First, let’s agree: spaving is not saving.

The idea of ‘spending to save’ (or spaving), is all around us. We’re not talking about real bargains on things you plan to spend money on. It’s more those deals that are aimed at getting us to drop money and not miss out.

For instance, I just had an offer come into my inbox to save $8 – as long as I spend at least $60 by Monday, 11.59pm. Time’s running out!

But if these deals are just getting us to spend more on things we hadn’t planned on, there is no saving – nothing being set aside for anything. True saving is stashing cash for something good.

Frugal living is not necessarily saving, either.

Spending less can certainly be a good thing. But the whole ‘avocado on toast’ uproar – where it was suggested that Millennials will never save house deposits because they splash out in cafés on the weekend – is laughable. You may as well just keep your spending to what makes you happiest and not feel deprived.

Saving $10 dollars just once won’t do much. It needs to be little and often, and more savings can be found in looking at how we rent or what we drive. For some of us, being overly frugal just causes splurges to happen at other times. Those small savings end up absorbed in our cash flow and then spent on a night out a few days later.

So sure, we may stretch our dollars further by living frugally, but unless we’re actually putting that money away in a separate account and investing it, there’s no getting ahead.

Short-term saving helps, but just a bit.

Saving up for things ahead of time should never go out of style. It’s still so much better to put money aside for upcoming purchases or for an emergency – it keeps us from racking up debt.

But the short-term stuff is still not the true saving that will matter in time. We save a bit up and then use it, rinse and repeat, but this won’t truly be getting us ahead.

So what saving counts most?

The saving we’re after is what truly moves us forward financially:

• Paying down any kind of debt above the minimum payment, including cards or a mortgage. Erasing your debt gets your net worth trending up and saves you heaps in interest. And without those debt repayments, you’ll be able to set aside even more money going forward.
• Setting aside money and investing it for a larger goal, such as:
  • Your first home
  • Your long-term goals, like retirement
• Putting money into assets that lead to financial independence
• Paying down a student loan – although it’s less of a priority than high-interest debt or investing because it’s interest-free if you’re not overseas.
  

These kinds of savings either reduce your debt, add to your assets or accomplish a larger goal like buying a home. They’re the savings that will increase your net worth meaningfully.

Shannon Lee Simmons, author of Worry-Free Money, in fact, calls this “meaningful savings”.

“Meaningful Savings has the job of improving your overall financial wellbeing – debt repayment, retirement savings, saving up to buy [property],” she explains.

Tips to dial up your meaningful savings

Some things that will help increase your real savings are:

• Pay yourself first. Each time you’re paid, funnel some money into a separate account for each goal you have, or directly towards debt repayments.
• Make your savings as automatic as possible. An automatic payment typically takes all of five minutes to set up online, and you can schedule it the day after your pay comes in.
• Top-up your KiwiSaver account. Since KiwiSaver is geared to goals that are meaningful – a first home or retirement – any added contributions count. Lift your meaningful savings from the 3% minimum (for employees) to 4%, 6%, 8% or even 10%. Or simply transfer an extra amount that fits your budget from your bank account to your KiwiSaver.
• Invest beyond KiwiSaver. Buying assets such as shares directly, or investing indirectly in managed funds allows you to compound returns powerfully over time.

So how much of your savings is meaningful?

To answer this question, you could jot down a list, or you could turn to our very own budgeting tool.

By creating a category for meaningful savings, you can chart how much of your incomings you have flowing towards real savings. You can even create another budget just to geek out and play with.

You should include:

• Any extra money you have going toward repaying debt (above the minimum payment)
• Any KiwiSaver contributions you have going into your account (from you, the government and your employer if you are an employee).
• Any other goal-based long-term money you are setting aside and investing.

At the moment, the budgeting tool is telling me that my meaningful savings seems to be sitting at 17%. Is that good? Bad? Our situations and lives are all different. But the point here is – is there anything we can tweak to push that even higher?

Look for opportunities

Going forward, if you have any chance to increase your meaningful savings, jump at it.

And wherever possible, automate your meaningful savings each time you are paid, so it is ‘out of sight, out of mind’, growing in the bank or in investments such as shares. Thanks to compound interest, you’ll be surprised at how quickly it can snowball.

This is the sort of saving that matters most, and anything we can do to increase it dials up our wellbeing, security and independence that much quicker.