Thursday, September 30, 2010

Definition of SAVING

Longman Dictionary defines saving as

1) all the money that you have saved, especially in a bank.
2) an amount of something that you have not used or spent
3) the act of keeping money so that you can use it later.

I would like to emphasize the item # 3.

Money earned are meant to be spent, not keep. If you dug a hole and kept the bank note inside, the value of money in the economy system is gone, forever.

The question is - When should you use the money? Use it now or use it later or much later. Who is using it? You or others?

Saving is part of income allocation process. When you earn money (income), you decide how much to spend NOW and how much to spend LATER.

For the part of money you have decided to spend later, where do you keep it? Usually bank, right? No wonder the first line in the dictionary define the saving as "all the money that you have saved, especially in a bank".

There are many places you can keep your income (that are allocated for future use) other than bank:
  1. Inside an old milo tin under your bed (too dangerous for large sum)
  2. With your friend (Lending principle: if you are prepared to totally lose it)
  3. In share market (i.e. park it with someone else pocket and hopefully one day someone else willing to pay more to buy back the shares)
  4. In mutual fund (a.k.a. Unit Trust) (and hope the fund manager will give you 10% while you give him 1%-2% per year regardless of his or her performance)
  5. Insurance company (join in their life fund that invest in diversified and controlled type of investment)
Breakdown of saving
Since the meaning of saving is actually WHEN TO USE the money, you will have periods of short term , medium term and long term.

  • Short term - Saving for daily expenses, emergency and raining days
  • Medium term - Saving for buying something later (house/car) or invest somewhere when right time comes
  • Long term - Saving for children education and retirement.
For different requirement, you will need to use different vehicle. If you want to go to China (from Malaysia), best way is by airplane. Of course by car also can reach but that is not a preferred way in term of cost and speed, right?

Future Money

The danger of credit card is people tends to use their "future" money. Unless you know you have enough money to pay the credit card bill by end of the month, you are using your "future money". The problem is "future money" is uncertain and doesn't exist yet. A businessman can have a credit card limit of RM200,000 yet average spending is only RM20,000 and he have money in bank of RM200,000 to settle the bill anytime - then the credit card is a good tool for him.

If you can't afford iPhone 4 or 60" latest model LCD TV with cash but sign up a 36 months installment plan with your credit card, then can be bad as:-
  1. You probably spend beyond your earning (Against the basic rule of personal finance)
  2. You can't control your desire (Against the rule of self-discipline)
  3. You forgo opportunity to accumulate wealth for yourself.