Savings is something sacred that you need to build up and guard against loss. Warren Buffet has some famous rules about not losing money. We should not rely on savings for spending money. Rather savings should working in your favor while you use other financing to get by. All too often, savings is treated as a sort of sinking fund, money set aside to pay off debt or to repurchase a depreciating asset. But, you don’t save money for the purpose of spending it.
For example, we put retirement money away with the idea that we are going to draw from it and it should last us for the remainder of our life expectancy. Your savings need to last until age 70, 80, 90, or however long people in your family tend to live. The idea is to die before you run out of money. Financial advisers nerd out making calculations with average rates of returns, withdrawal rates, tax brackets, fees, and all manner of variables. But, in the end, you’re still drawing down to zero which may arrive at an unplanned time anyway.
But, shouldn’t the plan be that your wealth will be greater as you grow older in retirement? Isn’t it better that your wealth continues to grow faster than you are spending it in retirement?
What if you could make a car down payment or take a vacation with money that will replenish itself and more?
Every economic decision we make is a financing decision. Everything has an opportunity cost. Every dollar you spend stops working for you.
Ideally, you could save a ton of money so that you could live off of dividends and interest. But, even if you cannot live entirely off this type of income, how would your life be better now if you had an extra$100, $200, or $500 per month in income?
You won’t have that if you keep spending your savings. Once you start dipping into principal, you start to diminish your passive income.
If you find yourself in need of money, you should really consider doing gigs and selling stuff off before you start dipping into your savings. Even a lousy part-time job that can’t support you can slow the bleeding of your savings. Reduce your lifestyle. Do whatever it takes to preserve your pile of cash that’s working for you.
Avoid interrupting the power of compounding as much as possible. Every dollar your stash generates is a dollar you didn’t have to sell your soul for at a job.
One way to get by a financial squeeze is to use your money as collateral to borrow against it. This way your money keeps working for you while you find that next job or pay off what you borrowed. This is similar to taking out a HELOC, except that your home is not a money-maker. Your money, on the other hand, is a money-maker.
If there is one takeaway from this post, it is that savings is for growing, not for spending. You can spend the income or reinvest it. Just don’t rely on your savings as a source of spending money.