Savings are money set aside for the purpose of later use immediately when one needs it. What purpose the savings serve can vary, from saving to a down payment on a car or a house to saving for a luxury item or vacation. Nevertheless, they all have one thing in common: liquidity.
For simple definition, Liquidity is how fast one can exchange things (e.g. assets and securities) for cash. For example, cash is the most liquid form of asset there is because, simply put, one can exchange cash for anything else with the same value. The exchange is instant, therefore it is very liquid. On the other extreme side of the scale, a house is considered illiquid because in order to exchange the house for cash, you would need to find a willing buyer, which can take many months.
How fast you can pull cash out of something is important to your financial security.
Savings are considered the most liquid form of asset one can possess. Access to cash is instant and can pay for anything at a moment's notice. This Savings could be anything: a piggy bank filled with coins, a steel safe with paper money, or a number at a bank's checking or savings account. They all are liquid as you have immediate access to that money. (Note: There is no distinction between a checking and savings account at a bank regarding the concept of Savings. They both serve the same purpose as a form of liquid cash, with the interest rates and withdrawal restrictions the only real defining feature between the two.)
Cars, gold, the home, and other valuable goods are virtually not dependable enough to be used as Savings themselves as they lack the means to quickly convert themselves into real cash: they are illiquid. Converting such assets into cash requires time to negotiate and sell, and even then the equity of the assets themselves is not guaranteed. Cash itself is the best type of asset to have in one's Savings as it can be used to instantly fund a purchase and typically does not lose value in the short term against Inflation.
That said, Savings are designed primarily to safeguard against an immediate financial crisis as an Emergency Fund, particularly when an expense requires more than what one's current income can afford. When a line of income is cut and basic necessities are at risk, one can tap into the Emergency Fund to pay for these goods and services until more income becomes available in the future. It is a stopgap to keep oneself financially secure for a short period of time and prevent reliance on credit and incurring compounding debt as a result. Lost income is always a possibility, especially in poor economic conditions, and it is recommended that one saves at least 3 to 6 months-worth of living expenses to survive a loss in income. This can go up to a year's worth in the most extreme cases, however anymore put into Savings after that point becomes a lost opportunity to invest in assets. Save enough to be secure, but not too much to become a hindrance to your own financial growth. Savings themselves lose value to Inflation and the negligible interest accrued from a bank's savings account doesn't come close to protecting its value from Inflation.
There are some that use Savings for extravagances, and while it is acceptable to splurge on luxuries every so often, there are better ways to save for an extravagance than putting it in cash, such as buying Stock or Bonds. Extravagances can be delayed. Basic living needs cannot. Savings are meant to cover for this basic living needs, and thus the money needed to fund it should be immediate, not risked in anything that is locked away for a substantial time or incur any sort of loss.
Saving to have enough of a 3-6 month Emergency Fund requires good Budgeting practices. Most importantly: discipline. Yet many people neglect to budget in their everyday lives, let alone for their Savings. Establishing an Emergency Fund Savings is one of the first steps to take in achieving financial independence. Without it, any mishap in one's life could severely overwhelm one's finances and set themselves back many months or even years if one is not careful. It only takes a second to ruin one's life. Safeguard yourself by safeguarding your finances. Use your Savings for an Emergency Fund and build it to account for a minimum of 3-month's living expenses. Do not neglect your savings and do not depend on your current income to rescue you. Savings will save your financial future when you need it the most.
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