You’ve probably heard that you should be saving money each month. It’s one of those things that’s just supposed to be good for you, like eating broccoli or flossing before you go to bed.
But why is it important to save money?
And, if you’re already stretched covering your current expenses, and possibly also paying back debt (such as student loans), you may wonder, why even bother to try saving?
The answer is that everyone has to start somewhere, and even just putting aside a little bit every month is well worthwhile.
That’s because having savings can decrease worry (since you have back-up should a sudden expense come up), help you reach your goals (such as making a large purchase or downpayment on home), and also help you earn money without doing anything at all (yes, money can do that).
Understanding why saving is important—and learning how to make it happen—might be the fuel you need to get started.
Reasons Why Saving Money is Important
It can be hard to get motivated to save money just because it’s the “responsible” thing to do. But you may see the appeal once you understand the huge advantages that saving offers. Here are a few.
Peace of Mind
If money is tight, you may find yourself worrying how you will pay the rent or other critical bills if an extra unexpected expense were to suddenly come up, as they often do.
Financial experts generally recommend building up an emergency fund of at least three months worth of living expenses to prepare for any financial surprises.
Having this contingency fund in your back pocket can provide the sense of security that comes with knowing you can get through a rough spot without hardship.
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Saving is beneficial for non-emergencies too. Say you are hoping to be able to afford a major expense in the future, such as a wedding, vacation, home renovation, or sending a kid to college.
You could finance these big-ticket items with debt, whether through high-interest credit cards, loans, or a home equity line of credit.
However, borrowing generally means that you’ll be paying more than you borrowed thanks to interest that accrues.
If you save up for your dream in advance, you can side-step debt, which can help save a significant amount of cash in the long run.
Expanding Your Options
Generally, the more money you have saved, the more control you can have over your life.
If you’re unhappy with where you live, for instance, having some savings can open up the possibility of moving to a more desirable location, or putting a downpayment on a new home.
If you dislike your job, having a cushion of savings might afford you the option of leaving that job even before you have another one lined up.
Money certainly does not solve all problems, but having savings can give you a little bit of breathing room and allow you to take positive steps in your life.
Benefiting from Compound Interest
Another big incentive to save is the power of compound interest.
Compound interest means you earn a return not just on the amount you originally put away, but also on the interest that accumulates.
Over time, that means you can end up with much more than you started with. And the earlier you start saving, the more your money grows, since compound interest is able to work its magic over a longer time horizon.
For example, a person who starts putting $100 per month towards retirement at age 25 will wind up putting $12,000 more of their money into their retirement fund by age 65 than the person who started saving $100 per month at age 35.
But because of compound interest (and assuming a 7% annual rate of return), the person who started at 25 will wind up with over $120,000 more at age 65 (way more than the extra $12,000 they invested). Please note that this is a hypothetical scenario and does not represent an actual investment. All investing involves risk.
How to Get Started with Saving
If you’re convinced that saving is the right move, how do you actually do it? The key is to make a budget and make sticking to it easy.
This doesn’t have to be intimidating. The key is to get familiar with what you spend, what you earn, and what your goals are.
Here are some steps you could take to help get started.
Figuring Out What You’re Saving For
Is it a long-term goal, like retirement or your kids’ college tuition? A short-term goal, like an emergency fund? Or a medium-term goal, like a wedding or home renovation? It can help to get a sense of how much you need to stash away and by when.
The point of this is twofold: First, you can divide the amount you need by the months left until your deadline to get a clear picture of how much you’ll need to save each month.
Second, you will know where to put your money. If your goal is less than a couple of years away, you may want to keep your savings in a high-yield savings account, checking and savings account, online savings account, or money market account.
These options can help you earn more interest than a standard savings account but still allow you to access your money when you need it.
If your goal is in the distant future, you might want to invest the money in a retirement account, 529 college savings plan, or brokerage account so that it has the chance to grow over time.
Sticking to a Budget
You don’t really know where your money is going unless you track it. That’s why for a month or two, you may want to take note of all your daily and monthly expenses.
Next, you’ll want to tally up your net monthly income, meaning what goes into your account after taxes and deductions.
The difference between your monthly income and your expenses is what you have left over to save. If there’s not enough left over, you can work on finding ways to cut spending or increase your income.
Putting Savings on Autopilot
If you’re manually putting cash away every month, it can be easy to fall behind.
For one thing, you may forget to move money into savings regularly amid your busy schedule. And, unless you protect the money in advance by transferring it to a different account, you may accidentally spend it.
One way to avoid this is to set up automated savings through your bank account or retirement plan.
If you’re putting away the amount you identified you need for your goal, you may get there without even thinking about it.
Saving money is highly important–it can provide peace of mind, open up options that improve your quality of life, increase your wealth due to compound interest, and may even allow you to retire early.
Many people earn wealth through a combination of working and savvy saving.
Looking to save for a future goal (like buying a car or making downpayment on a home?) Consider signing up for a checking and savings account with SoFi.
With SoFi Checking and Savings Vaults, you can separate your spending from your savings while still earning competitive interest on all your money.
Vaults also allow you to track your savings progress and set up recurring monthly deposits (which could help you reach your savings goal faster). Plus, there are no account or minimum balance fees.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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