It can be tough to figure out how to make ends meet, let alone save for the future. Yet, it’s still important to save, and not just spare change, but as much as you can. Unfortunately, however, you’ll never be able to save unless you have compelling enough reasons to do so. So why should you prioritize saving? Is saving money really important? The answer is yes, and here are 6 reasons to save money starting today.
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In This Article
- 1. Save for emergency purposes
- 2. Save to invest for retirement
- 3. Save to take advantage of rising interest rates
- 4. Save for a House Downpayment (or Home Ownership expenses)
- 5. Save for financial freedom (And to retire early if you want)
- 6. Save to pursue a dream career
- Tips on how to start saving
1. Save for emergency purposes
If you were to lose your job today, you’d be glad you put money aside in an emergency fund to help you get by until you found something else.
And losing a job is not the only emergency that can arise. It could be an unexpected car repair, the replacement of a broken appliance, or an expensive medical bill.
Studies show that 60% of millennials earning more than $100k live paycheck to paycheck. Four out of 10 adults would need to borrow money from friends or relatives or use a credit card if a $400 emergency occurred.
Ideally, you should have enough saved up to cover three to six months of your expenses.
For example, if your household spends an average of $4500 a month, you should aim at having between $13,500 and $27,000 in your emergency fund.
2. Save to invest for retirement
The next most important reason you should start saving is your retirement.
The biggest mistake young people make is putting off saving because retirement seems so far away.
However, time is your best friend when it comes to retirement savings.
The earlier you start saving into your 401k or Roth IRA, the less you’ll be forced to save in the future.
And the earlier you start investing, the better your returns will be due to the compounding effect principle.
Here’s an example of a scenario:
Let’s say you’re 25, and you start saving $100 a month into a good retirement account or an S&P500 index fund with an average return of 11.5%. If you continue to do this each month until you’re 65, you’ll have a million dollars (precisely $1,024,946) by the time you retire.
Now, if you wait just ten years to start saving the $100 a month, you’ll only have $320,000 for retirement. So that means that the ten years you waited to invest cost you about $700,000. Ouch!
Now let’s say you’re 35, and you acknowledge that you made a mistake. You’re now determined to reach the millionaire status by $65 by all means possible. You’ll now be forced to save $320 every month to achieve your goal.
3. Save to take advantage of rising interest rates
With interest rates bound to rise in the next few months, you not only want a cash buffer to brace for tough economic times but also want to be in a position to take advantage.
Where you save your money is crucial. If you save in a high-yield savings account, money market account, savings bond, or certificate of deposit (CD), you’ll receive interest on your savings. And when interest rates rise, your earnings will also rise.
On the other hand, credit card rates climb in tandem with interest rates.
As a result, having cash in savings in case of an emergency is even more crucial, so you don’t have to depend on costly borrowing to pay your bills.
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4. Save for a House Downpayment (or Home Ownership expenses)
Did you know that homeowners have an average net worth that’s 40 times more than renters? Homeownership is one of the most effective ways to build wealth.
And when it comes to purchasing a house, the more money you can save for a down payment, the less your mortgage will cost. This is because you’ll get the best interest rate. And it’s also the case for any loan, regardless of the amount borrowed.
For this reason, you should save as much as you can before making a major purchase. For example, suppose you can save 20% of the purchase price. In that case, you’ll not only pay less in interest but will also be able to avoid private mortgage insurance payments.
Don’t worry if you can’t save 20%. Some government-backed mortgages like FHA loans allow as little as 3.5%.
If you’re already a homeowner, you know that sometimes emergency repairs do occur, and they can be costly at times. Putting money aside for such an occurrence will save you plenty of headaches.
5. Save for financial freedom (And to retire early if you want)
Let’s face it, the freedom and independence to do whatever you want, work whenever you like, and travel to wherever you enjoy is something we all strive to achieve one day.
But why wait till you’re old?
One of the most important reasons to save money is so that you can achieve financial independence and maybe retire early if you so wish.
Saving money allows you to put away money for future use instead of spending it all now.
This allows you the opportunity to accumulate wealth and eventually have enough money saved up so that you don’t have to work anymore.
So, if you want to be able to retire early and enjoy your golden years without having to worry about money, it’s essential to start saving now!
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6. Save to pursue a dream career
Ever known someone who was stuck in a job they despised because they lacked the financial means to leave and pursue a passion? I imagine that wouldn’t be the case if they had enough savings.
One of the most crucial reasons to save money is to provide yourself the opportunity to work in a field that you enjoy.
There’s no reason to put up with a career you dislike when you have plenty of cash in your savings account and a stack of assets collecting interest.
In other words, having a large savings account allows you to leave a job you don’t like and follow your desired career.
Tips on how to start saving
- Figure out your net salary by subtracting taxes and other deductions from your gross pay
- Decide how much you want to save each month – start small if you’re not used to saving money
- .Automate your savings, so the money is transferred directly from your bank account to a savings or investment account
- Make it a habit to review your finances every month and adjust your savings amount as needed.
- Celebrate each milestone along the way, like when you hit your first $1,000 saved or when you’ve saved up to six months’ worth of living expenses.
In conclusion, there are a few key reasons to save money and to prioritize it.
One of the most important is that it allows you to achieve financial stability and peace of mind.
It also gives you a cushion in case of tough times and enables you to invest in your future (e.g., by saving for a house down payment).
Finally, it teaches you how to live within your means and be responsible with your finances. All of these skills are important not just for your personal life but also for your professional life as well.