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When I talk to people about saving money, the conversation always goes one of two ways.
- The person is not saving money at all and gives me a list of reasons why they can’t save any money.
- The person is saving some money from every paycheck, using the “pay yourself first” method (which is awesome, by the way), but when I ask what they are saving for, they give me a blank stare and say “savings”.
Though I commend the person for saving money instead of blowing it all, I do think that having arbitrary savings is a complete waste of money.
Money Without a Name is Worthless
Let’s say you have saved up $5,000 in your savings account, and it’s sitting there, rocking a sweet 0.04% interest rate. You have diligently saved for the last 10 months and have built a nice savings account for………..for……….something…?
You might say that it’s “in case of emergencies” but find yourself pulling out some cash to buy clothes or for that weekend getaway to Lake Tahoe.
Those aren’t emergencies, so your account is not a true emergency fund.
You just have a weird looking pile of cash that has an identity crisis. You poke a prod and pull cash out of the pile when “necessary”, but that pile can’t ever tell you “hey, that’s not what I was made for, you’re using me wrong.”
Ok, that was a really bad analogy, but I think you get where I’m going with this.
If you have an arbitrary pile of money saved up without a name, then you will not use it properly. Money is a tool to be used for many things in your daily life.
Money is not there to make you happy, but to enable purchasing products/services that are necessary or fun. When money comes into your possession, the worst thing you can do is to not give it a name.
Your money WILL BE USED FOR SOMETHING someday, so it is advantageous to assign it to a task as soon as you get it, lest you spend it all on coffee and pop tarts.
How To Give Your Money An Identity
So, we have established that a pile of unnamed cash is a bad thing. So how do you go about giving it a name?
Well, first you need to start by creating a budget. Once you have established how much you need to pay for your necessities, you then can start planning for upcoming expenses by setting up your savings buckets.
After that, if you have any extra cash in your budget, you then can start giving that money a name.
Depending on you current financial situation, your extra cash will have different names.
If you don’t have any savings, I recommend your extra cash go toward building an emergency fund of one month of expenses.
If you are in debt, I recommend to put all of your extra cash toward paying off that consumer debt. Start by paying off your smallest debt first and then the next smallest and so on until your debt free (also known as the debt snowball).
Once you’re debt free, you have a few options: you can build a larger emergency fund (especially recommended for homeowners and those with only one income), or you can start investing toward retirement.
Heck, you can even do both at the same time! Maybe you want to pay off your mortgage in the next 7 years? I don’t have a hard and fast rule for what to do with your extra cash after becoming debt free, but definitely give your money a name and put it to work!
Comments: Do you have a lonely, confused pile of cash with no name? What do you do with your savings? If you haven’t given your money a name, why not? Why do I always get dizzy and nauseous when writing these articles on the bus? WHEN ARE THEY GOING TO FIX THOSE POTHOLES?!