What is Life Savings?
You may be familiar with this phrase. You probably heard it in the context of spending all one’s money on something. For example, I spent my life savings on a house. Maybe a friend spent their life savings on a car when they were a teenager. Perhaps you heard a tragic story about someone who got scammed out of their life savings. It’s hard to read stories like that, and I do hope nothing like that ever happens to you. There are true scary stories out there about bitcoin scams and the like.
Life savings meaning
Your life savings is the sum of all the savings you have. If you took all your money and made one big pile, that would be your life savings. With all the digit banking and assets these days, that might not be possible. Another way to think about it, your life savings is the sum of all your assets. Every bank account, investment account, crypto wallet, and the stacks of cold hard cash.
Is there a dictionary definition of life savings? Not really. If you check out these three online dictionaries, there are no definitions. Nada. Zip. Zilch.
Life savings definition
Looks like it’s up to us to create a sensible and reasonable definition. Here’s the definition according to simple money habits.
“The current sum of all your assets”
— SIMPLE MONEY HABITS
Is it life savings or life saving?
If you’re talking about saving someone’s life, it’s life saving. If you’re talking about all the money or assets someone has, it’s life savings.
What are life savings used for?
We really like financial goals at simple money habits. Goals are the bedrock of financial life planning. Once you create financial goals, you’ve defined what you need for important moments in your life. This is what you should be using your savings for. Save, invest, and grow your money to reach your goals.
Plan your financial goals individually. Plan it all out. Write it all down. There are many things you’ll need money for. Here’s a short list to get you started:
- New car
- Vacation
- Wedding
- Charity
- College
- Home renovation
- Start a business
- Retirement
- Long term care
The sum of these parts will define how much life savings you need to live your ideal life. This is what your life savings are for. Investing your savings will help your money grow. Investing wisely will help you reach your goals faster. It can also help you exceed your goals so you can live an even better life.
All money needs a goal. Money without a goal is purposeless. As a high achiever and reader here at simple money habits, you already know this. Our number one goal for all our visitors is financial freedom. The ultimate goal and purpose for your life savings. An investment portfolio that supports a meaningful life full of optional work. Fulfilling work. That’s your number one goal. If you can think of nothing else, make that the purpose of your life savings.
Average life savings
Are you curious about how your family’s life savings stacks up to the average American family? Let’s take a look at the Survey of Consumer Finances from the federal reserve. According to the most recent data, 2019, the average assets for an American family is $227,500.
Life savings or the sum of all your assets is an important financial number. However, your networth is a better indicator of your financial well-being. Net worth = assets minus liabilities. It’s how much you have leftover after your debts are paid.
The average networth for an American family in 2019 was $121,760. That low six-figure net worth suggests that the average American family has over $100,000 in debts.
Lifetime wealth ratio
Have you ever wondered what your life savings could be? What if you never paid taxes or spent any money and saved every penny you made? Enter the lifetime wealth ratio.
Think of this ratio as an indicator of how good you are at turning income into wealth. Taxes and investing are a factor. There’s no getting around that. This ratio still does a good job of bookending the beginning and end of your wealth creation ability.
The lifetime wealth ratio is your networth / total gross income. It’s a measure of the assets you have less you liabilities compared to all the income you’ve earned.
Here’s how to calculate your score
- First, go to socialsecurity.gov and create an account. The social security administration keeps track of your lifetime reporting income. This is the simplest way to see your lifetime earnings. It’s shocking to see on your computer screen. Try not to freak out.
- Next, calculate your networth. I’ve been using personal capital for years. It’s easy and it’s my favorite personal finance tool. I highly recommend it to everyone. Connect all your accounts and let personal capital calculate your networth.
Now you have your total income and your networth. Here’s the formula:
Lifetime wealth ratio = lifetime earnings / net worth.
Simple Money Habits scoring
- 0% to 25% – oh boy, we have work to do. Don’t worry we’ll help.
- 20% to 50% – OK OK, you’re on the right track. Time to optimize!
- 50% to 75% – Amazing! Financial freedom here we come 🙂
- > 100% – You’re doing it, high achiever! It might be time to FIRE!
Closing thoughts on life savings
- Set goals and give your money a purpose
- It’s not a good idea to do one thing will your entire life savings. If you find yourself thinking that, or wanting to do that. Find a financial expert and talk it through.
- Be skeptical. Don’t just trust anyone with your money. Do your homework.
- Track and measure your networth, not just your life savings aka your assets