What Do People Mean by 'Savings'?

Mintee on 28/10/2023 - 19:45
Last edited 28/10/2023 - 19:47

Hello

Ive always watched quite a number of self-help financial videos where a lot of people say things like
"By the age of 30 you should have 1 years worth of salary in your savings"
or
"You should have a years worth of funds in an emergency fund"
or even
"People go on holidays but 'dont touch their savings'"

I'm starting to get really confused by this…..consider things like the below:
If you have a PPOR and have equity? is this savings?
If you have investments in a stock market is this savings?
If you have an 'offset' account, is this saving?
Is equity in an investment property savings? then contributions to this loan savings?

What's considered to be savings, then, when you use savings, when is it not savings?

Financial

Comments

  • coffeeinmyveins on 28/10/2023 - 19:50
    +12

    Generally speaking when people say "savings" they mean cash in a bank account.

    Stockmarket shares don't count as savings. How quickly can you liquidate them to do something with? There's also the volatility of them to consider.

    Interesting that you mention an offset account, technically this is not "cash" you have available because if you take it out you pay interest on it.

    It really comes down to how you look at wealth generation and what your risk profile is. If you're young and have no dependants, you may (probably) invest in crypto and can accept the potential losses. If you are older and more risk averse you may go for less risky things like a term deposit with cash.

    "By the age of 30 you should have 1 years worth of salary in your savings"

    that just sounds like absolute rubbish made up to either make people feel inadequate or feel like they've achieved something.

    1 year of savings for someone on $40k is a lot harder to get than someone on $200k given the opportunities it opens up. I'd liken that phrase to the old "3 months salary for a diamond ring" bull crap.

    • Settero on 28/10/2023 - 20:22
      +2

      if op is talking pure "savings" then the 1 year aspect and dont touch for holidays is total bs, however if people are implying it as an emergency fund… , offset counts , most people in my circle say 6 months , this is in case you lose your job or have any unforeseen emergency expenses, this allows you to ride out the tight spot without going into debt ,this is also why it should be liquid.

    • SBOB on 28/10/2023 - 20:23
      +6

      Interesting that you mention an offset account, technically this is not "cash" you have available because if you take it out you pay interest on it.

      I would think an offset account should be be counted as cash the same as funds in a savings account are

      Cash in a savings account earning interest is earning x% (likely less than your mortgage rate) and is taxed.
      Cash in an offset account offset interest is effectively earning you y% (likely more than a savings account) and is tax free.

      Both are effectively as liquid as each other.
      Both have an opportunity cost loss the same if needing to be liquidated for expenses.

      • Ghost47 on 29/10/2023 - 22:02
        -1

        I would think an offset account should be be counted as cash the same as funds in a savings account are

        That really depends.

        Both have an opportunity cost loss the same if needing to be liquidated for expenses.

        If you are only considering it from an interest earned/saved and/or tax perspective, yes. But when you withdraw money from an offset account — depending on its balance — there can be different consequences.

        Example 1: Offset Balance <= Mortgage Balance Example 2: Offset Balance > Mortgage Balance
        $500k (or $1m) in offset, $1m mortgage. Principal still owed is $500k (or $0). $1.5m in offset, $1m mortgage. Principal still owed is $0 (because the balance exceeds the mortgage).
        If I withdraw $100k from the offset I will have $400k (or $900k) left. I go backwards in both the offset balance and the repayments may change. After withdrawal, $600k (or $100k) is now required to discharge mortgage. I can withdraw <=$500k before I start owing any principal, because the balance exceeds the principal owed.

        An offset can be thought of as a "negative balance account", i.e. an account that starts off as a negative value and you are trying to reach $0, after which any positive value can be spent freely. If you have a $1m mortgage and you have $200k in offset, your savings is -$800k because you have debt that needs to be paid off. Sure, the money in the account is liquid and you can go and withdraw $50k for a new car if you want, but that means the principal increases to $850k (as you are now -$850k in savings). The principal owed doesn't magically go away, that money still needs to be paid to the bank (assuming you want to eventually own the title to the property).

        I define savings as money you can use freely. If I have $5 in my wallet and I don't owe the bank, that money can be spent freely (although I will go backwards by $5). If I have $5 in my wallet but I owe the bank, I can spend that money but I will go backwards by $5 and still owe $5. Money in an offset isn't really "yours", sure you earned it and you saved it, but that money is supposed to be exchanged for the property title.

        Funds in a offset and savings account are only the same in terms of liquidity. A credit card gives me access to liquidity too, it doesn't mean I should go out and max it.

        • SBOB on 30/10/2023 - 07:08
          +2

          That's clearly not what the term of savings and emergency funds is detailing in this post.

          Based on that criteria, anyone with a debt such as a mortgage only has "savings" in such that their net asset/funds entire financial position is counted as savings.

          For a net debt/asset assessment, sure. For someone in the real world managing their daily expenses and debts, additional funds put aside or invested on top of whatever minimum debt repayment level they are happy with would be considered 'savings' when talking about things like holiday funds, emergency funds, liquid assets etc, such as what this post is talking about.

          • Ghost47 on 30/10/2023 - 17:33
            -1

            @SBOB:

            That's clearly not what the term of sings and emergency funds is detailing in this post.

            The OP is asking what people mean by savings. It's obvious that people have a different definition of what savings actually is. I gave my definition below (i.e. "I would describe…" which you saw), if you don't agree with it that's fine. I'm simply presenting the reasons behind my belief and that won't change.

            In the real world if you dip into your offset you'll eventually need to replace that money because it means the principal offset has decreased. I mean sure, people can treat their offset like their savings and take 10% out of the $300k they have in there (when they need to offset a principal of $800k for example), but that won't magically mean that somehow they've paid off the property by the amount they've withdrawn. Some people are fine to do so, others like myself would rather not do that at all.

    • donga100 on 29/10/2023 - 10:12
      +1

      Stockmarket shares don't count as savings. How quickly can you liquidate them to do something with?

      1-2 business days? What scenario would require a years salary in cash in less than 2 days?

      • SBOB on 29/10/2023 - 10:20
        +1

        What scenario would require a years salary in cash in less than 2 days?

        bikies?

  • boomramada on 28/10/2023 - 20:00

    You know you got enough savings when you manage to pay off your CC repayments on time, and not living by pay cheque to pay cheque but still managed to go on a holiday.

    • Stopback on 28/10/2023 - 21:30

      And you are in track for retirement

      • fieldofmars on 29/10/2023 - 11:03

        Had me in the first half, not gonna lie.

  • Seraphin7 on 28/10/2023 - 20:07
    +3

    Yes, it's an interesting and somewhat loosely defined term. I've taken it to mean that you have access to funds that would allow you to maintain your lifestyle (perhaps while pulling your head in somewhat) for "x" months if you had no income coming in.

    By that definition it includes bank accounts, shares and other similar assets that can be liquidated within days, loan equity/offsets (i.e. that you can withdraw with little to no notice).

    It does not include properties (PPOR or investment), assets such as cars/boats, etc., any other "physical good" for which you would need to source a buyer and negotiate a sale, superannuation, or property equity that you cannot withdraw without refinancing a loan.

  • Jimothy Wongingtons on 28/10/2023 - 20:09
    +5

    By the age of 30 you should have 1 years worth of salary in your savings"

    *sweats profusely *

    • JimmyF on 28/10/2023 - 20:10
      +3

      You're over 30, so no need to comply now ;)

      • Jimothy Wongingtons on 28/10/2023 - 20:11
        +6

        I wish to subscribe to more of your quick hacks

      • AustriaBargain on 28/10/2023 - 21:37
        +1

        You have minus three years to save a year's salary 🙃

    • Stopback on 28/10/2023 - 20:13

      Don't worry you got tenure.

      Or gov job

    • SBOB on 28/10/2023 - 20:23
      +3

      Quit job, no salary, mission accomplished

      • El cheepo on 29/10/2023 - 00:59
        +5

        Financial advisers hate this one simple hack.

        • Nugs on 29/10/2023 - 10:16
          +1

          Because anything divided by zero is infinity, can't do better than infinite
          .

  • JimmyF on 28/10/2023 - 20:10
    +2

    If you have a PPOR and have equity? is this savings?

    No

    If you have investments in a stock market is this savings?

    If you're happy to sell them to cover an emergency need for cash, then yes.

    If you have an 'offset' account, is this saving?

    As above, only if you're happy to take it out for an emergency need.

    Is equity in an investment property savings? then contributions to this loan savings?

    No

  • Stopback on 28/10/2023 - 20:43
    +1

    I would say anything you that you could make liquid within 40 days and non essential (cover Credit card) should be considered savings.

    Techincally you could down grade your car.

    Sell jewlery.

    Consider home and contents insurance, there is a lot of things people consider valuable.

    • AustriaBargain on 28/10/2023 - 21:36

      You can sell stocks whenever you want generally, though the timing may not suit you.

    • JimmyF on 29/10/2023 - 14:10
      +1

      Techincally you could down grade your car.
      Sell jewlery.

      Thats technically selling 'assets' not generally classed as savings, even more so when its a depreciating asset like a car.

    • coffeeinmyveins on 29/10/2023 - 21:38
      +1

      Techincally you could down grade your car.

      Cool so if I buy a $100k merc technically i have almost $100k in savings? :D

  • Mintee on 28/10/2023 - 21:11

    So then how do I know if I'm doing well?

    • Ughhh on 28/10/2023 - 22:02
      +1

      Do you have to track or count down to your pay check?

    • helpme on 28/10/2023 - 22:55
      +1

      Well relative to who? The human population? Probably

    • cashless on 28/10/2023 - 23:32
      +1

      Other than mortgage, are you in debt?

    • morse on 29/10/2023 - 04:38
      +1

      Probably map out your financial goals in terms of home ownersship, future investments, holidays, items you’ll need/want to buy, retirement plans, child rearing etc.

      If you can realistically achieve your goals with your current income and budget then you’re doing well.

  • bdl on 28/10/2023 - 21:42
    +2

    Funds that visiting Ozbargain makes disappear.

    • Neoika on 29/10/2023 - 06:47
      +1

      Do regular neggars have higher savings?

  • TheMindsetTraveller on 28/10/2023 - 22:36
    +1

    Know what you want in your life before you think about money. Motivational stuff will say, "people can be miserable with lots, and be happy with nothing". If backpacking around the world and visiting 200+ countries is something you really want to do - then go for it, but if you want a Tesla in the drive because all your mates have one, then go for it too, trade a year's of your time working in a job that you probably don't like to impress the people who won't ever care or matter.

  • miwahni on 28/10/2023 - 22:50

    I consider anything in the bank that isn't earmarked for another purpose = savings. I have separate accounts for various purposes eg bills, holiday etc, and another account which is just for a rainy day. That account is my savings. Eg I can go on holidays, using the money in my holiday account, without touching my savings. I do consider my share portfolio as a form of long-term savings, too, as it can be liquidated quickly, although I prefer to think of it as part of a retirement strategy.
    Anyway that's how I interpret your question.

  • p1 ama on 28/10/2023 - 23:33
    +1

    Ive always watched quite a number of self-help financial videos where a lot of people say things like

    FWIW, I've always found self-help financial content (videos, talk shows…etc.) to just all be a scam. They seem to all have this incentive to set very lofty or vague financial goals that everyone should be hitting, which invariably, very few are. This stokes some form of insecurity when one feels like they have less money than others, then leads them to consume more and more useless content on how they can be financially independent (or whatever).

    I work in financial markets. The only advice that 95% of people not born insanely rich need to know is that (i) your PPOR is likely to become your largest investment, so get on it early, (ii) diversified low-fee index strategies are best in the long run, (iii) be patient, and always remember to reap the rewards of your savings. It's really that simple, there are no tricks. Those financially successful are either lucky or patient. If you don't want to test your luck, then be patient.

  • morse on 29/10/2023 - 04:35

    It’s probably a bit of an outdated term but for me it would be money in a bank account or if someone has a mortgage in their offset account (to me it would be odd to have money in a bank account that wasn’t an offset account with a mortgage). I think now people are more concerned with assets and investments than ‘savings’ but most people would want to have access to some amount of money for unexpected expenses that need to be paid quickly.

  • ForkSnorter on 29/10/2023 - 07:50
    +1

    In my experience, many Australians have a distorted view of savings.

    For example, they might not have any money in the bank but they might have a house and an investment property and heaps of debt.

    Then, when the (theoretical) value of their house and/or investment property increases, they act like they have suddenly received heaps of money, and go and buy themselves a new car or something that they don’t need, and they pretend like the car was free.

    In reality, they’re not going to sell the house/investment property and even if they did, it’s not guaranteed it would sell for the (theoretical) assumed value of it, plus they would have to pay tax on the capital gains of the investment property. So they’ve actually increased their debt, and increased their monthly mortgage bill and the time required to repay their mortgage, while acting like they’re financially savvy. I mean, this might make sense if you’re wealthy or on a very high salary, but even average people on low incomes do this.

    If everyone does this, then it's like the economy is kind of subsidising people's lifestyles, which is partly why we get rapid inflation.

  • Sinnerator on 29/10/2023 - 08:49
    +1

    savings means how much or how little time you spend sobbing looking at your bills

  • Dollar General on 29/10/2023 - 08:51
    +3

    To ozbargainers, savings refers to how much you save buy purchasing something you don’t need

  • LFO on 29/10/2023 - 14:27

    Savings = what has not been expended

  • Some Human on 29/10/2023 - 15:47
    +1

    If you have a debt, you don't have savings.

  • Ghost47 on 29/10/2023 - 18:38

    I would describe savings as liquid funds that are not required to pay off any liabilities/debt, e.g. money in a savings account, shares, a piggy bank on your desk.

    IMO money in an offset is not savings because it offsets the outstanding mortgage balance, if you withdraw funds your mortgage balance goes backwards

    If you calculate your net worth (i.e. assets minus liabilities) your savings would be the difference; your net worth would either be positive or negative. Positive means you actually have savings, negative means you don't have savings, or at least the "savings" you do have is required to pay off any outstanding debts.

    • SBOB on 29/10/2023 - 19:22
      +2

      If you don't put your additional funds in your offset and instead deposit them in your savings account first (or whatever other avenues you consider liquid funds), what is the net difference?
      Mortgage debt of $x
      Excess funds either in a savings account or an offset account of $y

      Your net debt liability ($x-$y) is the same.

      You're just paying tax on your interest earnings which are likely at a lower rate than your debt interest, rather than effectively earning interest at your mortgage rate (tax free) by offsetting your liability.

      • Ghost47 on 29/10/2023 - 20:04

        The main point of my definition of savings is the bolded part here: liquid funds that are not required to pay off any liabilities/debt.

        You're just paying tax on your interest earnings which are likely at a lower rate than your debt interest, rather than effectively earning interest at your mortgage rate (tax free) by offsetting your liability.

        Sure, I don't disagree with that.

        I'm not sure I get your point. If you have an offset account, the money is not your savings other than the fact you have "saved" it. But when the offset balance fully offsets the mortgage you either have two choices:

        1) You pay off the mortgage which means the bank takes the money and your mortgage is discharged then you fully own the property (and unfortunate events like losing your job could not end up disastrously, e.g. you are unable to get an income for an extended period of time so you default on your loan and the bank takes the house)

        or

        2) You withdraw some money for a holiday, car, investment etc. which in reality sends you backwards because that means you will still need to still replace that money to offset the mortgage. This second example could be performed when the mortgage is not fully offset.

        If a mortgage is fully offset by the balance in the offset account then that is "savings" (edit: any funds that exceed the mortgage balance I mean).

  • pogichinoy on 30/10/2023 - 12:26

    Liquid cash in the bank or in physical form.

  • Ultimate Gattai on 31/10/2023 - 03:21

    A year's worth of emergency funds seems extreme, I would have thought 3 months would be more appropriate, you don't want to hoard large amounts of cash unless you're saving for something like a home deposit.

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