We can categorize financial savings into common groups based on different types of expenses:
- Hard Savings: Short-term variable expenses, which fall under expense management (Hawley, 2018). It is also known as Cost Savings (Dawson, 2018). In other words, savings that have a direct impact now, like cost reduction or revenue enhancement (WarehouseBlueprint, 2017). Here we want to have proactive disciplined spending to help fund investment opportunities down the line (Hawley, 2018). For instance, if you reduce your outside dining experience over the next month or two, to save money.
- Cost Avoidance: Consumption of resources, this falls under part of optimization (Hawley, 2018). Another way to look at cost avoidance is to lower your potential incurred future expenses by reducing the gap in financial losses (Dawson, 2018; Study.com, n.d.). You will need to be managing and planning for your needs and wants (Hawley, 2018). Here, this reminds me of using everything you got in the kitchen before you buy a new set of groceries. Find new recipes and reduce your costs of buying more food, while older food gets unused and expires. The avoidance of expiring food is cost avoidance.
- Potential Savings: Consumption of resources, which also falls under part of optimization. You should be identifying new opportunities and offerings to meet your needs and wants (Hawley, 2018). This is usually longer-term savings, like finding ways to cut your budget for the long-term, like reducing your phone bill to just a cell-phone bill or removing an unused gym membership expense from your budget. Another example is when you begin shifting your energy use to off energy peak hours.
- Write-downs: Amortization and Depreciation, which is essentially debt that needs to following financial compliance and to adjust the balance sheet numbers (Hawley, 2018; Investing Answers, 2019). This is the reduction of the book value of an asset-based (Investing Answers, 2019). For example, the mortgage on your house and the tax write-offs associated with it. Also, there can be the value of your car which depreciates when you drive it off the lot and is based on fundamental changes like mileage, age, and condition.
- Delayed Savings: Extrapolated values for investments and funded projects, which could depend on a variety of factors (Girosi, et. al., 2005). We should be asking ourselves here if the investments are aligned to our objects, risk profile, and goals (Hawley, 2018). For an illustration, buying solar panels now may incur a cost today, but the eventual savings on the electric bill will be realized in the future.
- Future Debt: Debt to be incurred when undergoing investments and funded projects (Hawley, 2018). It is a debt that will be created or is created but will not be due today (The Law Dictionary, n.d.). For instance, future rental properties one finances to create cash flow, where a portion of the money will go to paying the mortgage and the rest goes elsewhere.
None of this can come into fruition without periodic reviews of your budget, expenses, and other data points so that you can adjust your plan of action.
- Dawson, J. (2018). Cost Avoidance vs Cost Savings: What’s the Difference? Retrieved from https://www.g2intelligence.com/cost-avoidance-vs-cost-savings-whats-the-difference/
- Girosi, F., Meili, R., and Scoville, R. (2005). Extrapolating Evidence of Health Information Technology Savings and cost. Chapter 2. Retrieved from https://www.jstor.org/stable/10.7249/mg410hlth.8?seq=1#metadata_info_tab_contents
- Hawley, L. (2018, March). How Purpose Distinguishes SunTrust. Paper presented at the Apptio User Group: Atlanta, GA.
- Investing Answers (2019). Write-down. Retrieved from https://investinganswers.com/dictionary/w/write-down
- Law Dictionary, The. (n.d.). What is Future Debt? Retrieved from https://thelawdictionary.org/future-debt/
- Study.com (n.d.). What is Cost Avoidance? – Definition & Examples. Retrieved from (Hawley, 2018)
- WarehouseBlueprint. (2017). Hard Savings versus Soft Savings. Retrieved from https://warehouseblueprint.com/hard-savings-versus-soft-savings/