The terms savings is used quite generally. Putting money into savings can mean different things to different people. Even having to “dip into savings” could carry wildly different implications. Are you spending money in a cash reserve? This is, potentially, absolutely fine and a world away from having to sell off things like investments. A cash reserve is a short to medium term sum of money, investments are for the long term. I think savings should be thought about in three ways: Investments, Piggy banks and funds.

Investments
These are your long term, retirement or F-U money savings. This involves buying assets that will grow and/or generate income in the long term, either in the stock market or in real estate. You won’t be withdrawing from these unless you have literally no other choices! The rest of the blog is more or less about investing, so no need to give it more space here other than to say this should be the first priority when money comes in.

Piggy Banks
Crucially, these have a set end date and end sum of money. Once you know these two pieces of information, you can then work out how many pay periods there are between the current date and the end date. This will give you how much you need to contribute each pay period. If this is too much for your monthly budget to bear (e.g. it impacts on your investments or ability to survive on anything more satisfying than ramen packs), you need to either increase the end date or decrease the price.

A deposit for a house would be an appropriate piggy bank, although smaller items are fine too. My new iPhone, for example, took about 8 months of saving for. It’s possible to hack piggy banks a little for gains by locking money away in a money market account. These usually pay pretty low interest, but the money is secure and you know you won’t need it for the period it is locked away. You’ll get only a little back on the cash you are saving, but it’s better than nothing. If you’re saving for a home deposit over 3 years, once you have the first years contributions you could put them into this style of account, then Year 2. By the end of Year 3 you would have your deposit saved and a little extra from the interest.

Any money that will be needed in five years or less should be put in a piggy bank instead of investments to avoid the fluctuations of the market. Low interest rates are better than the a sudden market decline sapping your money just as you need it!

A piggy bank lasts only as long as the date that is initially set for it. The money is spent entirely on the thing that is saved for. It is not raided (it doesn’t need to be if you have a cash reserve). The nice thing about this approach is there is always a sense of having worked and earned what is being spent on. Piggy banks are absolutely intentional as they are medium to long term goals. Buyers remorse is less likely – you set this path and the money was earmarked for the purpose set out when the piggy bank was created. They are second in line for what you do with money received through wages, just behind investments.

Funds
These have no set end date and can we withdrawn upon as soon as they get to an acceptable level. They are then topped up as money comes in and should be considered short term savings.

For example, we dislike cleaning our apartment (who does?!) and domestic help is generally quite cheap and available here in Asia. However, we do not want this as a regular daily or weekly expense. Every so often it would be nice if the apartment was given some deep cleaning…by someone else. The point is, paying someone seems trivial to justify if small sums are set aside each month for it. If it takes four months or two months makes little difference. We’ll use the money if we have it, we won’t if we don’t. Perhaps you like to go out to an expensive restaurant every so often or splurge in some other way. A fund means you can choose whether to wait a month or spend it all now. It doesn’t matter either way as it shouldn’t affect any other part of your finances.

You can also look at the overall amount you are left with after investments, repayments (if you have any) and piggy banks as a fund. It’s a living expenses fund. It fluctuates every time you spend and it gets topped up when you get paid. Similarly, a cash reserve (or emergency fund) should be looked at in a similar way. The only real difference is that a cash reserve would normally be calculated as a certain amount of expenses (classically somewhere between 3-12 months).

TLDR: When money comes into your account, move it into investments, piggy banks and your funds (in that order!).