We apologize in advance if this discussion is too concentrated on minutiae and definitions, but we’d like to clarify an issue (with the help of our readers!).
Let’s just throw it out here: “How do you define savings?“. It’s a serious question, and you’re going to get two articles with serious answers… one from yours truly and another from Cameron, our resident Economist. Let me lead with my definition: ‘savings’ (to me) is any money set aside from current earnings that is easily accessible, liquid, fungible, and has a reasonable chance for maintenance of principal and appreciation.
Let me be clear – my definition of savings is more broad than just what you put into a savings account. Accessibility to me means you have reasonable, somewhat ready access to your money. This might mean a savings account, a checking account or even a brokerage account. In all of those cases any money, funds, or equities you have are reasonably easy to withdraw.
Note that I’m not limiting this definition to just brokerage and bank accounts. Money in a safe, gold and silver coins, even cash under your mattress or buried in your back yard can qualify as accessible.
Here’s where my definition starts to diverge from Cameron’s. I think, for something to qualify as savings, it has to be reasonably liquid. That means that I don’t count things like paying down principal or equity as savings. When it comes to categories like home equity, it is true that some equirty can be reasonably accessible with financial products like home equity loans, but the fact remains that those products are more expensive to use than other options. Also, to truly access the equity in commonly financing purchases like cars and houses, usually you have to sell that asset.
In my mind, for you to count something as savings it must be liquid and fungible. However, as some precious metal coins have a strict definition and metal content, they might be fungible (if not liquid). I’m somewhat undecided on where I fall on precious metal, but I think if you forced me to decide… diverting some of your funds to silver or gold it probably counts as savings.
Maintenance of Principal and Appreciation
See what I did with that title? I listed maintenance of principal before I did appreciation. In your overall savings plan, you’ll want to target a little bit of both. With your emergency funds, you’ll want to aim for the first part… maintenance of principal. Since I also think your investments should count as savings (although some might be better classified as retirement savings since their accessibility is in question until retirement), you should have your appreciation base covered as well. The difference, of course, is the emergency fund should guarantee you your principal, while your other accounts provide more upside.
Summing Up Savings
I felt it was important to lay out exactly what I mean by ‘savings’, especially since I have written articles about my savings rate. So, to summarize, here is what I consider savings, by my definition:
- Savings and Checking Accounts
- Retirement Accounts
- Taxable Brokerage Accounts
- Health Savings Accounts
I don’t count collectibles, home equity, vehicle equity, reduction of debt principal, unscratched lottery tickets, or anything of that sort. I do, however, bring ‘investment’ and ‘savings’ under the same umbrella with this definition.