Do You Save First or Spend First?

Posted by Jill on October 21, 2010

I asked recently whether you thought a financial fast was right for you. I’ve definitely come to the conclusion that it’s not for me. But as I try to work out my financial goals going forward, I’m trying to figure out exactly what is right for me long-term.

Each time I get a paycheck, should I save as much as I need to meet my goals and then spend the rest freely? Or spend what I actually need and save the rest? I thought it would be good to explore each option a little further, and figured some of our readers might be interested as well.

Option 1: Save only what you need

  • What it looks like: Figure out what you need to save from each paycheck for retirement, short-term goals like upcoming travel or annual payments, and long-term goals such as a house down payment, a new car, or your kids’ college. Set aside that amount faithfully, whether it’s 25% of your paycheck or 2.5%, and spend the rest freely on all those things personal finance blogs beg you not to do: eating out, daily lattes, vacations, clothes, etc. As long as you are avoiding new debt and meeting your savings goals, just don’t worry about how you spend the rest of your money.
  • Reasons to do it: It’s fun. It’s still responsible since you’re taking care of savings first. And you can’t take your money with you when you die…so you might as well enjoy it now.
  • Reasons not to: Anything can happen. Your retirement assumptions might be way off, your car might need replacing faster than anticipated, you could lose your job, you or someone in your family could face big medical bills. Basically, you can never be too safe.
  • Other things to consider: Can you ever really save enough? Worst case, your money outlasts you and you leave some to your family and friends or favorite charities.

Option 2: Spend only what you need

  • What it looks like: Give yourself a small “allowance” for necessary food, shelter, transportation, personal hygiene and similar needs. Bank every other dollar, regardless of whether you have a plan for it. Budget carefully, use coupons and other strategies to minimize expenses, and then sit back and watch that interest roll in.
  • Reasons to do it: Few people would argue that having more money in the bank is a bad thing. You are prepared for anything this way, and you can always use it for a major purchase down the road – even if it’s just a vacation to reward yourself for so many years of diligence! See also: “reasons not to” under Option 1 above.
  • Reasons not to: It’s hard to save with no goals in sight. Everyone deserves a treat now and then. See also: “reasons to do it” under Option 1 above.
  • Other things to consider: Is there such a thing as being too money conscious? Will it be easier to make good financial decisions on the big things if you give yourself some breathing room when it comes to the small things?

My conclusion

Right now, I’m not really following either of the strategies above – I’m neither spending nor saving as much as I could, and neither saving nor spending only what I need.

Exploring the two options above, I’m not sure either is right for me at this time in my life. I think Option 1 is probably good for people in the later stages of life, who are all-but-certain their retirement funds will last and have few if any savings goals still outstanding.

Conversely, Option 2 is good for the very young, those who haven’t quite developed savings goals yet, or those who can’t meet their savings goals no matter how much they try – they should at least get as close as possible.

Of course the unspoken in both of these is that getting out of debt should trump spending and anything but emergency savings! But if you’re on track to meet your goals, and also want to give yourself a little breathing room (like me), I think it’s ok to find your own personal balance between saving and spending.

What about you? What strategy are you using as you continue on your personal finance journey?

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Comments to Do You Save First or Spend First?

  1. With teenagers, anything you plan goes out the window. I’ve always spent, then saved what was left but recently, I’ve forced things to go the other direction. My kids can always borrow for college, but I can’t borrow for retirement.


    • Your last sentence is so true! Glad you are bulking up on retirement savings.


  2. Saving first is the best way to go. You need to have a plan for why you’re saving, then save that amount up front. If you don’t, you’ll spend it all and you’ll never save money. Great post!

    Chris Gagner @

    • I totally agree Chris. I guess what I was struggling with is this – if you save what you know you need to up front, can you be free to spend the rest without guilt? Or should you still strive to be frugal and spend as little as possible, so that you can bulk up your savings even more?


  3. I recommend that you save your money first, because that is the hardest part for most people. If you can consistently put a set amount aside each month you will become wealthier over your years. It is those that are inconsistent that struggle saving money. There is always going to be some place that you could use the extra cash.


    • Thanks Bruce. I would have the same question for you as for Chris above – once you know you are saving what you need, do you still try to save more over and beyond that?


  4. I concur with Bruce. It’s wiser to put aside money in savings/retirement. Some employers may match a certain percent of your 401k contribution, so that would be something to take advantage of. Plus, you can take advantage of automatic payroll deduction to contribute to 401k. You wouldn’t be tempted to touch the portion that is allocated for retirement.

    I believe you can contribute up to $16k of before tax income to 401K. What I’m doing is contributing up to the max what my employer is contributing, which is 4% of my bi-weekly paycheck. The rest will go into Roth IRA, which I can only contribute up to $5k per year.

    The beauty of Roth IRA is that your portfolio grows tax free. Also, when you’re eligible to withdraw from the Roth IRA (age 59.5 years old?), the earnings is NOT taxed.

    I graduated college 4 years ago, and I wished someone had told me about Roth IRAs. Fortunately, I still have time to build up on my retirement.


    • Hi Paul,
      Sounds like you are doing great for someone so young! There are people who are 40 or even 50 and would kill to know even half of what you already do! It is definitely smart to get the full employer match.

      Do you have other savings beyond retirement? How do you strike a balance between retirement savings, cash savings and spending?


      • My parents and friends have told me to save enough for 6 to 8 months of rainy day fund. When I took Dave Ramsey’s financial peace class, it turns out I had taken that step. It took me about two years to do that.

        My top priority was to take advantage of Roth IRA and 401k match. Whatever was left, I allocated them into rainy day fund, stocks, mortgage and bills. I don’t have too much for personal spending. Sometimes I will dip into savings for travel, or I will work overtime.

        I try to limit personal expenses by watching DVDs at home or friends place rather than movie theaters, work out or play sports and etc. Sometimes, I’ll join my friends/co-workers for happy hour, but I rarely buy drinks. I end up spending less than my friends. Unfortunately, it’s hard to see how much you save when you take steps like this.


  5. Aside from my retirement savings, in 401K and IRA vehicles, I really don’t have a goal, per se, for my savings. I sock away a good percentage of my earnings every week, and just let it accumulate in a general opportunities/emergencies/fun fund. Sometimes, I use it to buy an item on my “want” list that’s available at a great price, sometimes I use it to repair vehicles, and recently I took a dream trip to Europe with some of it. Having a cash cushion is a wonderful feeling!


    • I agree Jon, knowing that you can buy/do something you really want or need is great! Once you sock that flat percentage away, do you spend the rest? If you don’t spend the rest, what happens to it?


  6. I think the most important thing is to figure out you – which one would be best for your habits. KNOW THYSELF!

    Notwithstanding, I need to save first. My spending “magically” reduces if I don’t have the money sitting in my checking account.


    • Thanks Evan. I have been trying to explain the exact same phenomenon to family members recently. If you make your debt payments (or savings contributions) as soon as you get paid, you CAN’T spend that money!


  7. I agree with most of the comments above, saving first is easier for most people than controlling spending. It’s best to have your savings come directly out of your paycheck (401k, split your direct deposit, etc) and then you never “see” the money to spend it. It doesn’t necessarily have to be “only what you need”, but the idea is that saving is the first priority.


    • Thanks Cecil. I generally agree. But I’m glad to see such a great conversation going here!


  8. We contribute to all of our set goals ($500 to emergency fund, $500 to home and auto maintenance account, $250 to vacation account, etc), then we pay all of our bills (usually $1500 total on rewards credit cards and the amounts debited automatically like our mortgage and overpayment), and then we split any remaining money between savings and fun.

    Budgeting in the Fun Stuff

    • That sounds quite healthy/balanced. Thanks for the input!


  9. Beware, no one really knows if Roth and Standard IRAs will always remain tax-free – their status is a great promotional vehicle, and the government wants solvent retirees as much as possible, but all it takes is one round of demagogues whipping people up against the “rich” to strip the accounts of their tax protection forever. And all that planning goes out the window. (At least in that case it’s no better or worse than a non-IRA investment strategy.) Another good reason to over-allocate to your retirement savings – you never know how the regulatory landscape is going to change during your lifetime. Might get better, might get worse, might just be a lot of changes for no good effect.

    Josh Bowman

    • Thanks for the input Josh.


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