Does savings count as a bill or an expense?

Falling sand grains

I talk a lot about making plans for spending money, because you want to spend your money intentionally and not just let it happen. Moreover, the objective is not to spend as little as possible, but just the right amount to achieve your goals. (People forget this part, thinking that spending less is intrinsically a good thing.)

If you think solely about the bills you need to pay all that counts as expenses, you may be wondering: “Where does savings happen in the plan?

I get this question a lot, and it’s a good one. It’s good because it means that people are thinking about savings, and also, it’s got a straightforward answer.

Lots of kinds of savings

There are many different kinds of savings. Offhand, a few that come to mind are:

  • Emergency fund
  • Retirement fund
  • Travel fund
  • School fund

For the purposes of our discussion today, I won’t distinguish between the different kinds of savings funds. Chances are that you have more than one, but you can deal with all of them in the same way.

Pay yourself first

You’ve probably heard this one before, but the conventional wisdom on saving (one that I happen to agree with) is that you need to “pay yourself first”. This means that if you want to save, you need to be proactive about it, allocating the savings before allocating the rest of your money.

This makes sense as a good practice, because if you don’t pay the electric bill, your electric service gets turned off, but if you don’t pay your savings fund, no real consequences will result (aside from you having less money in savings, obviously.) So if you pay yourself first, you’ll still need to pay everyone else, so this system ensures that you will get paid along with everyone else.

Doing a little bit of saving, even when times are tight, can feel really motivating. Even when I was living in New York City and barely scraping by, I forced myself to put away something every month, sometimes as little as $25, just so I could look at my little savings pile and say it was growing. Feeling like I was moving the needle as opposed to sitting still was really helpful for me, even if the sums weren’t significant.

Rhymes with “schmill”

But let’s think about that method of “paying yourself first”. What does that sound like in the system I talk about?

To me, it sounds like a bill.

You know (generally) what your bills are going to be, as they are regular, usually one-time-per-month payments. That sounds like a savings plan to me.

So I suggest that you create a “bill” for every savings goal you have.

Are you saving up for a $1,200 plane ticket one year from now? Create a “bill” where you “owe” $100, due on the first day of the month.

Are you trying to max out your Roth IRA? With a maximum yearly contribution of $5,500 for many of us, that’s a bill of $500 a month, due on the first day of the month (with one month off).

If you want to automate this process (and I would definitely automate it, as it will help ensure that it happens) you can usually create a separate savings account (or accounts) with your bank, or failing that, set up an account with Ally or Capital One 360, both of which are free.

Expenses aren’t first

You could make the argument that your savings goals are an expense instead of a bill. You could create a “Savings” category and allocate money to it each month. Isn’t that just as good?

Well, kind of. In general, it’s all coming from the same place (your income), so as long as you put a plan in place and stick with it, it doesn’t technically matter whether you count your savings as a bill or an expense.

But I prefer counting savings as bills, and for a very good reason: bills come first.

When planning out your month, you start with your income, and then you subtract your bills. What remains is your expenses. It’s the expenses that are the most variable.

So if you think of savings as an expense, it moves away from the idea of “paying yourself first”. And then there’s a greater chance that you won’t do it. And that’s no good.

So treat your savings as a bill (or multiple bills) and you’ll be much more likely to do some saving. And let’s be honest, there’s a lot to save up for, so we better get started.

But enough about me. How do account for savings in your plan?

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