The Importance of Saving Money
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Let’s be honest. For most of us, spending money is way more fun than saving it. But, the importance of saving money cannot be overstated. So whether or not the habit of saving money comes easy to you, it’s helpful to keep yourself on track (or get yourself on track) by remembering all the reasons why saving is important. Sure, some of these reasons may seem terribly obvious, but they are important enough that we could all use a reminder every once in a while.
Focusing on the reasons why we should be saving money also helps reframe our thinking on the subject – and dare I say, make saving money seem a little bit more fun? Ok, too far. Maybe not fun, but at least purposeful.
No one can predict the future
No one can predict the future. Saving money provides you with a financial buffer so you are better equipped to handle future uncertainties. You could lose your job, unexpectedly have to take care of a loved one, or pay for a major home repair. There are an infinite number of things that could knock your life off course and cause financial hardship if you don’t have adequate savings.
The unpredictability of the future isn’t all negative though. You may decide that you’d like to pursue a new career you’re passionate about. Having enough savings to quit your current job and prepare for a new career is freeing. Without having enough savings, you may not have that type of flexibility.
You don’t want to work forever
Even people who love their jobs don’t want to work forever. Maybe they would enjoy continuing to work past a traditional retirement age, but they still don’t want to have to work forever. The rest of us dream and count down the days until we’ll be able to quit working. But, retiring isn’t possible without saving – and by saving, we really mean investing.
By putting those savings to work for you in an account like a Roth IRA or 401(k), you’ll be able to harness the power of compounding interest and likely retire much sooner than you would without saving and investing your money.
If you anticipate being able to count on social security to carry you through retirement, let this be a wakeup call for you:
As early as the 2030’s, the Social Security Administration anticipates some of its retirement benefit reserves to be fully depleted.
Yes, you read that right – as early as the 2030’s. Depending on when you’re planning to retire and if there are any tax or legal changes to these benefits in the coming years, you may only be able to count on a small portion of your expected social security benefits. Count on yourself, not social security.
Emergencies happen
If you don’t have an established emergency fund or financial safety net, now is your time to start. Emergencies happen. Health emergencies, natural disasters, global pandemics…you name it. Don’t fall victim to the superhero complex. Living life is a risky business, and believing you aren’t susceptible to the everyday risk we’re all exposed to is naive. For some perspective, 66.5% of Americans who filed for bankruptcy in 2019 did so because of medical-related reasons.
Having savings set aside in an emergency fund can go a long way to help prepare for the unexpected and ease the financial burden for when emergencies happen.
To purchase something in particular
Let’s take a break from listing all the scary reasons that highlight the importance of saving money and focus on some positive and productive reasons. Saving money is also really valuable for doing things like paying for school, putting a down payment on a house, and taking that vacation you’ve been dreaming of.
Saving money to help pay for large purchases like a house or an education means you’ll need to rely less on loans. Some loans can have costly interest rates which will ultimately cause you to pay more in the long run. Being able to put some of your savings towards these investments can help to drastically reduce the amount of interest you’ll end up paying.
As for the vacation, including that particular savings goal in your budget will make it that much easier to plan for and make that dream trip into a reality.
Reduce financial stress
Perhaps one of the most overlooked reasons to save money is to reduce financial stress. Regardless of what you’re saving for, knowing you have a buffer to deal with whatever comes your way can ease a great deal of worry and anxiety for you and your family. A 2018 poll found that 85% of Americans worry about their finances sometimes, and 30% worry constantly.
Any guesses as to the leading cause of that worry? Not having enough savings.
4 simple ways to make saving money easier
Just because something is important, doesn’t make it easy to do. However, there are some great tools and methods available that can help make saving money less challenging.
1. Put it in your budget
Saving money must be accounted for in your budget and will ensure you don’t accidentally overlook it. While the saying may be cliche, it’s absolutely true – pay yourself first. If you don’t, you’re likely to spend more money on things you don’t need, and then you may not have any money left over to save.
2. Round up your investments
Out of sight and out of a mind is a great way to simplify saving money. Because, if you don’t notice it, then you won’t miss spending it, right? Using a micro investment platform like Acorns allows you to round up your purchases to the nearest dollar so that extra money can be invested. It’s like the 2.0 version of saving your pocket change. But since hardly any of us use cash any more, this is an automated digital version of doing just that.
If that hasn’t piqued your interest enough, Acorns is giving new members $10 once they create an account and make their first investment.
3. Use smart deposits
Another similar automated approach to help you save money through investing is by utilizing smart deposits. Certain investment platforms, like M1 Finance and Betterment, allow you to set an upper threshold on your checking account. Once your account reaches that threshold, then any money above and beyond that amount will be automatically ‘smart’ deposited into the investment account of your choice.
For example, say your monthly expenses are usually $3,000. To account for some months which may involve more spending than others, you set your threshold at $4,500. If and when your checking account balance exceeds $4500, any amount of money above that threshold will be automatically transferred to your investment account.
4. Set up a separate savings account
Particularly for shorter term savings goals (vacation, down payment for a car, etc), consider setting up a separate savings account. Sometimes all you need is to reduce temptation in order to stick with your goals. By setting up a separate account that you only use to deposit funds (until you’re ready to cash in on your savings goal) you’ll be able to resist the urge to spend that money on anything else.
The bottom line
If saving money hasn’t been a part of your financial habits, now is the time to start. Managing money follows the Pareto Principle – it’s roughly 80% behavior and only 20% knowledge. So if you haven’t been saving, the most important thing you can do is start the habit. You’ve got to focus on creating the money-saving habit first, and then you can begin strategizing.
Everyone has to start somewhere. Deciding not to save the extra $50 you have at the end of month because it doesn’t seem like enough certainly won’t be the habit that builds up your savings. Stop mulling, start saving, and prioritize the steps that will help you reach your financial goals.
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