What do you mean when you say you’re saving money? You’re saving money for what? What do ‘savings’ mean to you?

For me, there are several categories of savings, with one category higher up my priority list and more ‘untouchable’ than the next. These categories include my retirement savings, money that I’m saving to spend on big ticket items, money for smaller purchases, and my emergency fund.

These savings categories all have their ranking – like a ladder – and in times of financial need, there’s a certain hierarchy I follow when choosing which of my savings I can withdraw from.

So what are these categories of saving and why do I have them?

Step 1: Retirement Savings

Obviously, retirement savings are meant to be spent during retirement. But the definition of the word ‘retirement’ varies from person to person. For me, it means the time when I am no longer physically or mentally able to work or earn money. For others, it could mean leaving their line of work when they reach the age of 65 or 70.

After you’ve defined retirement, you need to figure out how much you’ll be needing for the lifestyle you want. I’m currently 24, and the time between now and retirement seems a bit too far for me, so I haven’t calculated this exactly. I just put away as much as I can each month.

For me, this is money that I absolutely cannot touch until I reach retirement. After all, that’s what this is meant for. This is at the top of my savings ladder because it is the one that is farthest from my sight (since it’s a long time ’til then) and it’s also the last of my savings that I will touch. If I needed large amounts of money in a time of financial crisis, I’d go through the bottom levels first before spending my retirement savings.

Step 2: Savings for Long Term Goals/Expenses

This category is something that you’ll be saving up for a long time and with a lot of money – probably two or more years down the road and worth more than P100,000. In this case, you’re saving to spend it on a big purchase/expense such as:

• a house
• a car
• your child’s college education
• a round-the-world trip 10 years from now
• extensive home maintenance/upgrades

Personally, apart from the house I want to build, I want to save money for flying lessons. I haven’t planned it out financially yet, so I’m not sure when it will be – but it has to be within the next 10 years. I really don’t think it’s safe for me to start flying a plane when I’m 60 years old!

Step 3: Savings for Short Term Goals/Expenses

If you want a brand new gadget or something that costs less than P100,000 that you’ll be buying within a year, this is the category that it will fall in to. In my case, I’m saving up for the following:

• a laptop for myself this September
• a trip to Bohol with my partner this November
• real estate taxes for early next year

This could also include a new cellphone, new clothes, or whatever else you want to buy and save up for. Again, you’re saving this money to spend it – so don’t be sad if you’re withdrawing that P15,000 for a new cellphone. (If you are, then you probably don’t like that phone as much as you thought you did.)

I may touch these savings in times of a financial crisis, but only if the following category is depleted or cannot be accessed:

Step 4: Emergency Fund Savings

I’ve talked about emergency funds in the past. A quote from the post I wrote on the subject:

It’s basically a collection of money that you can access whenever there’s an emergency. And only an emergency. Emergencies may include the following: the sudden loss of a job, unforseen medical bills, a natural calamity, sudden home or vehicle repairs, etc.

Of course, this type of savings is the first one I withdraw from during a financial crisis. After all, that’s what it’s for.

Having this kind of ladderized savings system has the following benefits:

• It shows your true financial priorities. For me, it seems like I value financial security in times of need – hence the importance of my emergency fund and the self-imposed ‘sanctity’ of my retirement fund.
• It gives you a lot of back-up money whenever you’re in need. Although your emergency fund should be enough to cover that, sometimes one emergency follows another and before you can replenish your emergency fund, you’ve got another emergency coming. Let’s face it – sometimes bad things happen even if you’re good at planning. In this case, having several savings categories can provide a financial cushion whenever you need it.
• You feel like you can afford things more easily. Since you save up for small and big ticket items, you can pay for them worry-free when the time comes. You don’t have to worry about getting into debt or whether you have enough money for your living expenses.

Do you have a ladderized savings system? What are the things you save up for?

A recent financial IQ survey by Citibank shows some frightening results about the average Filipino’s financial well-being. According to the survey, only 1 out of 10 respondents have saved up for retirement.

only one out of 10 Filipinos is consciously saving up for retirement. The rest have some savings but don’t know if it will be enough, others have no idea at all on how much they need or have not started planning. – Agustin Davalos, retail bank director of Citibank Phils.

Personally, I’m not surprised by this. I went to my bank a few months ago and asked one of the tellers what my investment options were for my retirement savings (they’re currently in a time deposit, but I wanted to move them elsewhere with bigger returns). Her reaction? She laughed at me. She said that I was only 24 and should not be thinking about my retirement. Many people have reacted the same way.

They can laugh, but I know the facts. When I retire, I’ll probably be enjoying a nice vacation in Fiji while these people wait for “allowance” given to them by their kids, who are working full time by then.

If you’re young, the best time to save for retirement is NOW. Compound interest is your friend, people! Plus, if you’ve got a retirement savings fund when you’re 20, you have more chances to “play with it” and put it in riskier investments because you still have decades of savings ahead of you. But if you’re 50 years old, you can’t do the same because retirement is only some years ahead.

A more concrete example: my mother only started saving up for retirement 3 years ago. She’s 52. I also started saving up for retirement at roughly the same time. If we both retire at 65, she only has 13 working years left, while I have 41 years. Since I saved for my retirement earlier than she did, I will have more money to support myself then.

Odds are, I might even be supporting her to make up for the money she hasn’t saved. I do not want to do that to my kids. I do not want them to worry about my financial needs when they already have enough to worry about on their own. Because odds are, my children will need to support their own families and their own dreams. I do not want to stifle them financially. I do not want them to lead anything less than the lives they want and dream of.

If you’re not planning on having kids, or if that seems so distant to you, think about your own future. What kind of life do you want to lead when you retire? Do you think you have enough funds set aside for retirement?