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What is considered savings?

There was an interesting guest post on Thicken My Wallet that got me thinking about what is really considered savings. The author was going through a financial dilemma with her husband where he considered savings liquid money that is accessible when needed and she considers it in a different way.

Here’s a snippet:

… I am all for counting RRSPs, RESPs (there was some dissent on that) and the extra mortgage payments as savings – it’s all part of net worth, right? Seems straightforward to me. Tell me how to convince my husband. He refuses to count anything other than cold hard cash sitting safely in a high-interest bank account as savings. I went online and did a comprehensive net worth statement, and showed it to him – he made a pfffft sound which I interpreted as “I am entirely dismissing your attempt to argue a financial point other than my own. Your so-called net worth statement is nothing to me, woman.”

Technically, anything that is put away for yourself is considered savings. This includes RRSP contributions, non-registered account deposits, the equity portion of your mortgage payment and cash deposits into your chequing/savings account. I’m not sure about the RESP contributions as I would like to consider that money given to my child.

Personally though, I’ve realized that we take great comfort in having liquid cash savings around which is pretty obvious to those of you who follow my net worth updates. While I consider RRSP and non registered contributions savings, I tend to not consider mortgage payment equity to be savings as the money is not typically liquid unless you sell. There is a way around this however by getting a home equity line of credit.

So back to the original article, I would have to say that I lean towards the husbands opinion of savings.  That is an increasing net worth is not the same as increased savings.

Back to you, what do you consider savings?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 21 comments… add one }
  • MultifolDream$ September 9, 2008, 8:52 am

    By definition the savings are just the difference between the income and expenses, but I would consider as savings everything that is close to liquid cash as you say MDJ. The house, the car … are assets (some would say liabilities, depends how you look at them) that add to my net worth, but can not be considered as savings.

  • moneygardener September 9, 2008, 9:41 am

    The verb ‘saving’ – save the money to use for any purpose including a savings account, registered stocks, or a vacation.

    The noun ‘savings’ – I would consider this any money that is used in for something that is semi-liquid and kept inside your net worth statement. For example, savings accounts, GICs, non-registered stocks, registered stocks, cash under your mattress, or gold bars.

  • DividendMan September 9, 2008, 10:47 am

    I agree with you MDJ. I would not consider any purchase in my dividend porfolio “savings” because it’s not my intention to sell these companies at a later date to make some other type of purchase.

    Savings to me is money that is readily available for purchases.

    I guess it comes from saving to get something. I’m never going to save for a new TV or car or whatever by making larger mortgage payments or buying some stock and then selling (or getting a LOC) when I want to make the purchase.

  • Chuck September 9, 2008, 10:58 am

    I group my savings by purpose of the savings:
    RSP = retirement savings, so I’m reluctant to use this money for something other than its purpose

    Cash Account = savings that I’m investing. In an emergency I’d consider tapping into this

    Cash Savings = this is all of the stuff in my high interest savings account. Thanks to ING allowing you to set up sub accounts we’ve got a couple of categories like household savings, vacation fund.

  • Al September 9, 2008, 11:42 am

    Short term savings = cash
    Long term savings = stocks, bonds, mutual funds, etc (registered or not)

    They’re both savings, but with very different purposes and time horizons.

  • Dan September 9, 2008, 12:00 pm

    RESPs are savings until such time as your child actually uses the money. If you’ve actually used RESP funds or truly understand how you can spend it you’ll understand that it’s not just for your child(ren)’s tuition.

  • The Financial Blogger September 9, 2008, 12:06 pm

    I says that Money is Money no matter where it sits!
    You can put your money into your savings account earning a marvelous 3% (which is showing a negative yield after taxation and inflation) or you can do other stuff like invest, contribute to your RRSP’s, pay down your debts/mortgage.

    I consider savings when I can have access to my money so it doesn’t have to be only in a bank account. Even though they are taxable upon withdrawal, RRSP’s are accessible money.

    However, I would not consider RESPs in my savings but in my children’s savings instead. This money is not meant to be directly used by me, therefore, it is not “accessible”.

  • nobleea September 9, 2008, 12:07 pm

    Personally, I consider savings to be cash or highly liquid holdings that can be accessed. Whether they’re earmarked for home upgrades, travel, car maintenance, etc, doesn’t matter.

  • MultifolDream$ September 9, 2008, 12:10 pm

    I agree with Dan. I also consider the RESP saving as the actual usage of the money is still undetermined.
    The tricky part here is that you receive grants from the government and if you can not spend the money for you child’s education you have to give them back and this is in most cases big percentage (~20%) of the amount.

  • Canadian Capitalist September 9, 2008, 12:32 pm

    I personally consider RESP as part of our net worth but it’s a matter of taste. With net worth statements, I think it is best to pick one method and stick with it. A net worth statement is simply a scorecard and should be used to track our progress towards our financial goals.

  • DAvid September 9, 2008, 12:36 pm

    Frugal Trader said: ‘I tend to not consider mortgage payment equity to be savings as the money is not typically liquid unless you sell”

    Here is a quote from the RBC mortgage site:

    “If you have made double-up payments during the term of your mortgage, you have the option to skip an equal amount of payments.”

    This forms savings in my book, as the extra money I place against my mortgage is indeed retrievable, though not all at once. Were I in a situation where truly needed a lump sum, I could negotiate it with the bank. The real savings is the acute reduction in future payments I need make on the mortgage if I never need those savings, and the interest cost I save.

    DAvid

  • Patrick September 9, 2008, 12:49 pm

    Ok, you can consider “savings” to be different from net-worth-increases, but then you can’t use “savings” as a basis for evaluating alternatives. For example, if you look only at savings, then you would conclude that paying down your mortgage principal and buying a big-screen TV are equally good decisions because neither one of them increases your “savings”.

    So, define these words any way you want, but make sure you are using the right criteria to make your choices.

  • Dividend Growth Investor September 9, 2008, 1:19 pm

    To me savings is everything that I have in a liquid financial instrument be it cash under the mattress, bank deposits and other fixed income as well as stocks in a taxable and non-taxable accounts. If I ever really need as much money as I can get my hands on, I could easily monetize these into cold hard cash to spend frivolously :-) ( or tuck it under the mattress)

    I wouldn’t consider a house part of my savings. even though after it’s paid off “it saves” you money by not paying rent…

  • optionsforstocks September 9, 2008, 2:24 pm

    I will start with book difinition savings=income-expenses (mutifoldream$ said). Once saving is parked into an income generating assets it is considered as investment. It then becomes part of net worth.

    A person may be wealthy (by networth) but may be poor because there is not enough income for assets to pay his/her day to day expenses.

    I agree with husband that savings may not equal to investment until and unless it is cashed. Its cash value may not be equal to value of investments at the time of redemption.

    Having said, this is for educational argument. Practically, savings and investments converge to same if they are producing income.

  • Blogging About Money September 9, 2008, 2:26 pm

    FT, I think you hit the nail on the head, when you discussed the difference between the act of saving versus the actual savings on hand. It’s apparent that Thicken My Wallet and her husband have two different notions of the word savings, based on the verb and noun definitions.

    I always think you need to always continue to work on the act of savings, by paying down bad debts, building RRSP and other retirement and investment portfolios – but those aren’t liquid savings (as TMW husband would look at it).

    The emergency fund, the day-to-day savings fund and the GIC’s that are going to mature in 3-6 months. Those are cash savings. I personally view savings as the short-term liquidity available to me should I desperately require it – things that I would be able to get cash from immediately, without affecting longer-term plans. If you can’t or won’t touch it, it’s not savings.

    Plus, if you were to include RESP’s and RRSP’s as savings, you might as well consider the after-tax and after-penalty amount as savings, not what you see on your statements.

  • Thicken My Wallet September 9, 2008, 7:40 pm

    Thanks for the link. Just to make it clear, it was my columnist and her husband not me. As I wrote last week in another post, anything which is not used for consumption I considered savings.

  • Steve September 9, 2008, 8:16 pm

    To me savings are the $$ tucked away either in a bank, in a cookie jar or under your mattress. If you notice when calculating your net worth, “savings” is probably an item, just like other assets. Savings can be used immediately (or within a short period of time). I’m not saving if I’m paying down a mortgage (ok, perhaps interest in the long run).

  • The Rat September 10, 2008, 12:05 am

    To me savings constitute cash and any type of liquid asset that can be easily transferred into readily available cash such as equities, mutual funds, GICs, T-Bills, RRSPs, etc.

    I think that good debt such as owning a house with a mortgage is not actually direct savings; however, the equity that you build up with good debt can be used as a tool to increase your savings levels dramatically, if applied properly.

  • Fresh Start September 10, 2008, 2:35 am

    It’s interesting to run into this after having a talk with one of my co-workers about having “a little extra money set aside.” To me, extra means unallocated, and set aside means intentionally not going to be allocated. In generally, it’s hard for me to think of anything as extra if I can look at it and say, “That should probably cover rent for the next six months,” it’s earmarked for something. Anyway, that’s a separate matter all together and probably just a strange personal quirk of mine.

    I’m sure there’s some very technical definition of savings out there, but as I sit and try to think about what savings means to me, I have trouble putting it into words. I suppose the best I can think of right now is that I view any unspent cash that still has paydays before it needs to go out as savings. As much as I could lump investments in there, I tend to view invested money differently. Maybe it comes from having lived with someone who considered his TV an emergency fund. He did indeed drop it off at a pawn shop when the need arose.

  • Cannon_fodder September 10, 2008, 7:14 am

    I tend to be more granular, so I wouldn’t classify home equity (I don’t look at tapping into home equity to buy things except for investments), investments (these are for the long term), or even cash sitting in either a registered or non-registered account as savings (these are earmarked for long term investing).

    Savings would be liquid assets (cash or money market mutual funds or other very short term investment instruments) that do not have a specific purpose – which is why I have very little in what I would term ‘savings’.

    It is really a bit of semantics, since I associate the term savings with money that doesn’t have anything better to do than sit in an interest bearing account. But that is my personal definition and I could understand why someone would think the opposite way.

  • Scott September 10, 2008, 11:50 am

    Agree with Husband on this one, too. I wouldn’t consider a mortgage payment as savings; I would consider a payment to my RRSP account as savings. Payment to myself = savings; payment to anyone other than myself = payment.

    One is contributing to a decrease in debt, the other is an increase in, well, savings!

    But the husband really shouldn’t scoff at having such a financially astute wife! Bottom line, an increase in net worth is still an increase!

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