There Is No Such Thing as Savings
Having extra cash saved up (i.e. “Savings”) for future retirement is not just an old concept for the “freedom 55” generation. Savings actually never existed in the first place. At the end of any measured period, all that exists are your investments in assets.
J.M. Keynes was one of the first well known thinkers to write about savings on a macro level in the early 1900’s. He explained that people hold cash for several reasons. Two of these reasons are what he called “precautionary” and “speculative” motivations.
Precautionary motives would equate to what we would call a “rainy day fund” and speculative motives drive people to invest in liquid assets like stocks or bonds. The ratio of cash to bonds/stocks in the portfolio depends on whether or not you are at that time positive or negative about the market.
During a market crash, for example, investors sell their stocks (speculative), and move to cash (precautionary). The ratio of cash to assets changed, but at no point could one accurately call the cash balances “savings” in the way we talk about them individually.
Take it a step further: the liquidity actually hurts you. Moving the cash back and forth between speculative and precautionary actually makes it more likely you’ll lose the value to market gyrations (or trading fees). This is why the average net worth is made up of mainly assets that can’t be easily sold, like primary residences.
So here is a good rule for personal finances:
Over the long term, cash is either spent or invested. To see what you’ve really “saved” look at the investments you’ve made. If you want an indication of what your future asset base will be, look at your most non-liquid assets. You’ll find that lack of liquidity helps you save.
