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Moneycraft: Don’t borrow from yourself, it’s addictive

By Graham Kajilwa | November 27th 2021
By Graham Kajilwa | November 27th 2021

Are you caught up in a cycle where every time you seek to save some money you fall short? [Courtesy]

What does it mean to “dip into one’s savings”?

“Dip into” means taking something in small amounts in the sense of plunging one’s hand or a ladle into a pot, water, or the like for the purpose of taking something out.

The cycle goes like this: you save some money, you fall short before your next pay, you borrow from yourself and pay it back on payday, and then you’re short again. On and on it goes, with you dipping in and out of your savings account every month and never stopping. It’s all-consuming when you’re trying to save money but you never seem to really get anywhere!

What you are doing is saving to postponed expenditure which is as good as not saving.

So what needs should warrant one to dip into their savings?

There are unexpected and unforeseen circumstances which may call for one to dip into their savings. For instance, last year due to the covid-19 pandemic, millions of people worldwide had to dip into their savings to see them through lockdowns. The reality is no one is immune to financial crises but a better way to manage your money to prepare for such unforeseen events is to adopt the Bucketing method of saving.

Saving for a rainy day

Bucketing method of saving is a goal-oriented saving strategy in which you segment the money you are saving into separate accounts, each one earmarked for specific purposes. The system can help you to divide your savings for both short and long-term goals.

One of your buckets should be an emergency fund, which is an “opportunity fund or a financial confidence account” because emergency has a negative connotation and may instill fear.

When you organise your finances this way, you’re prepared for almost anything life throws your way. It’s not pessimistic to prepare for what might happen - you’re practicing positivity by saving for a rainy day.

This is your go-to account, and it should give you a lot of confidence that you’re using it for exactly what it should be used for. You can’t put a price on the feeling of security. But you can save for it.

Most emergencies are things you can’t afford without causing some pretty negative emotional or financial impacts, like going into debt or borrowing money from a friend or family member.

What is a financial emergency?

A financial emergency may look different to everyone but it’s important to instill personal discipline to use your financial confidence account only for events that are unexpected and urgent. This could be something like a job loss, car accident, illness, death or damage to your home after a storm.

By dividing your savings into these separate buckets, you can track your progress and prevent one goal from swallowing up money you meant to keep aside for equally important goals.

So how do you know when it’s time to dip into savings? And how can you do it best?

If you were saving a certain amount of money for a specific item (bucket saving method), then it’s pretty clear when you’ve reached your goal. When you’ve saved the money needed to completely pay for the item then you can use those savings.

Does dipping your hand into your savings now and then indicate that you are a poor financial planner?

Edith Siddondo, a certified money coach and author, founder & CEO of Profit Acumen, a money coaching firm. [Courtesy]

When money is tight or you have those inevitable months when you overspend, it can seem like the easy solution to dip into your savings account...But do this enough times and you may find that your savings account is not actually growing, or you’re not actually making any progress toward your financial goals.

Having to dip into your savings account month after month is a sign there is a problem with how you are managing your money. Either something is wrong with your planning/budgeting or you may be over-spending beyond your earnings.

If you use your own savings or investments to solve a financial issue that you would have borrowed money for instead, should you refund the money back to your savings kitty?

If you run into a big expense and you are considering tapping into your savings, make sure you know how the move is likely to affect your finances.

While there are benefits to paying cash for a big-ticket items or unexpected expense instead of financing it and paying interest on the borrowed money, doing so may cost you more than you intend.

It depends on how you secure the money.

People like the convenience and simplicity of paying cash for something, but it’s not always the best thing to do.

Refund the money

If you have emergency savings set aside for the unexpected, it could make sense to withdraw what you need and replenish the account as quickly as you can so that the money is there if there’s a repeat need.

On the other hand, if this means liquidating assets to get the cash, make sure you consider the financial implications holistically before tapping these investments to fund an unplanned expense.

This may need you to consult a finance professional for guidance.

Is it okay for one to borrow from the bank, Sacco or friend even when you have savings?

Spending your savings is much better than borrowing money in many ways as you are free from the stress of monthly repayments with interest and you are also not indebted to anyone. One of the primary drawbacks of savings is that a person can afford only to spend an amount which they have saved.

In such a situation, a person will have to limit their wants, and they will be limited by the amount of their savings. Thus, if a project or investment warrants higher spending, relying on savings won’t be enough and this is where debt financing comes in handy.

No debt is good debt is a common myth in the minds of several individuals who are strictly against borrowing money and spend their equity for making a purchase. But there are, times when it makes sense to go into debt and if appropriately planned and utilised, then debt can be used to leverage substantial gains. 

When deciding whether to use your saving or borrow, evaluate the pros and cons of both.

Any debt you consider to take should be a good debt. Good debt is defined as money owed for things that can help build wealth or increase income over time.

The final determinant of whether a debt is good or bad debt is what it does for you.

Ask yourself, after you have factored in the principal repayment, interest payments and the alternative uses of that money, does the debt still make sense?

This thought process will help you determine whether any debt is more burdensome than beneficial.

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