Two Common Misconceptions About Savings | Sixty and Me

One of the common misconceptions about savings I hear bandied around a lot is that you have to have a LOT of it to have a safe, secure future. This belief often leads to financial paralysis, where people either feel overwhelmed and don’t start saving at all, or they stash money away without a clear purpose, leading to inefficient financial management.

What Is Your Savings for?

This issue stems largely from how we label our savings. Simply calling it “savings,” or even more specifically “emergency fund” or “rainy day savings,” doesn’t provide enough and will make things harder on you in the future, and isn’t at all customized to your life. When an unexpected expense arises, how do you determine if this is an emergency? Without clear, personalized boundaries, we either end up using savings too soon, or not using it at all.

For this reason, I encourage my financial coaching clients to carefully name their savings and assign each dollar a job – just as they do with their spending.

For example, it’s much easier to decide when to use a savings fund labeled “20% Drop in Income” than one simply called “emergency fund.” A financial downturn is NOT the time to be debating what constitutes an emergency. Naming your savings with specific purposes in mind allows you to make swift, confident financial decisions in times of need.

Finances Create Stress

This practice is especially beneficial for couples. Financial hardship is one of the biggest sources of stress in relationships, and vague or undefined savings can add to the tension, conflicts, and disagreement. By proactively assigning names and purposes to savings accounts, couples can reduce conflict and increase confidence in their financial security. Knowing exactly when to tap into savings and when to leave it untouched means you often don’t need to save as much overall to feel secure.

Think of it this way: You wouldn’t pile all your money together and call it “spending money.” Instead, you likely allocate portions to mortgage, groceries, transportation, and entertainment. Savings should be managed in the same way – by giving each dollar a designated job.

Savings vs. Investments: Understanding the Difference

Another major misconception is the conflation between savings and investments. While we need both to have a healthy financial life, they serve distinct purposes. Savings exist to be used when needed, and it needs to be liquid for that reason. On the other hand, investments exist to grow wealth over time and provide us with choices in the future. The problem arises when people try to make their savings do double duty – both as a safety net and as a means of earning returns.

The issue with this mindset is that when the time comes to use the money, people hesitate because it’s earning returns. This creates an internal conflict: Do I handle this emergency, or do I keep my money growing? It’s a no-win situation. If you pull from an investment-based savings fund during a downturn, you may be putting your future at risk, further compounding the financial stress.

Instead, I encourage my clients to keep savings and investments separate. Let your investments focus on long-term growth, and let your savings be there to cover expenses such as vacations, income loss, or major purchases. This way, when financial needs arise, you can shore up the ship in the moment while still ensuring your future needs will be met.

Further read, Do You Know How to Start Investing in a Way that Lines Up with Your Values?

The Key Takeaway

To build a secure financial future, we don’t need to emotionally hoard massive amounts of savings – we need well-structured savings. By carefully and intentionally naming savings accounts and distinguishing savings from investments, we create financial clarity, reduce stress, and ultimately make smarter financial choices. It’s not just about how much you save, but how effectively you manage those savings.