Whether from parents, friends, or financial advisors, you have probably heard plenty of people say that you should be saving money. But did you ever stop and consider why exactly saving money is so important?
Saving money is truly a smart move: It can help you achieve your financial aspirations, prepare for the future, and weather unexpected events. It can even help you earn money without doing anything at all. When you look at it in a big-picture way, saving can relieve a lot of money stress from your life.
Granted, there are vacations to be taken, loans to be paid off, and all kinds of other uses for cash that could leave you without any to stash in savings. But by making saving a priority, you can really enhance your financial standing.
Here, you’ll learn more about this topic, including:
• The reasons why saving money is important
• How to start saving (as painlessly as possible)
• Where to store the cash you save.
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. After all, cars break down, and dental work can crop up. Or what if your kid discovers a passion for soccer and wants to go to a pricey summer camp.
Having savings in the bank can provide the sense of security that comes with knowing you can get through these kinds of moments without hardship. You’ll be able to have that back-up money to afford many of life’s expenses that crop up. By saving, you may also worry less about tomorrow, knowing that you have stashed away some cash. That means you can breathe a little easier.
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Avoiding Debt
When you have money in the bank, you can make purchases, planned or not, with your money that’s in the bank. That means you can avoid using high-interest credit cards or potentially taking out a personal loan or a home equity line of credit (HELOC) to pay for things.
That can help you 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 and your financial security.
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.
Having Financial Freedom
Another benefit of savings is that you are on a program that can give you financial freedom. If you stick to a plan of stashing 10% or 20% into savings, as many financial experts recommend, you can avoid always living paycheck to paycheck and have more financial freedom.
For example, with adequate savings, you might be able to take a sabbatical from work and pursue a passion project. You might have enough cash to start your own business or retire early. Or you might plan a luxe anniversary celebration somewhere tropical. Savings can enable your dreams.
Recommended: Guide to Improving Your Money Mindset
Saving for Big Purchases
Having a savings account is a great way to afford big purchases without racking up credit card debt and the high interest that goes along with it or turning to other expensive financing options.
Let’s say you want to take your kids on a Disney vacation or you really need that second car. Or maybe there’s a designer bag that you’re totally in love with. By putting money aside in a savings account and earning interest on those funds, you can be in a position to buy your wish-list item outright, rather than borrowing funds to do so.
Saving Money for Emergencies
Here’s another reason why it is important to save money: Life has its twists and turns. One minute, everything is humming along nicely, the next, your car needs $2,000 worth of repairs. Or the hot water heater conks out or you lose your job. These situations and others can put a real strain on your finances.
That’s why financial experts generally recommend building up an emergency fund of at least three to six months’ worth of living expenses to prepare for any financial surprises.
It can be hard to prioritize this, but saving for an emergency fund is important. To help make it happen, you might set up an automatic transfer from your checking into savings the day after payday. This can painlessly, seamlessly whisk money to your emergency fund so it doesn’t sit in savings, tempting you to spend it. Whether the amount is $15 or $150, just do it. Every bit helps.
Earning Interest
Savings accounts come with interest, which is the bank’s way of thanking you for keeping your money with them, where they can use it until you withdraw it.
Granted, the average savings accounts aren’t currently paying that much interest. In March of 2023, the average rate was 0.23%. However, if you look into an online savings account, you will likely find a much higher rate. Online banks, which don’t have to fund bricks-and-mortar branches, typically pass those savings along to their clients. They were paying in the 3.00% to 4.00% or even higher range as of March 2023.
That can help your savings along. If you have $5,000 in a savings account with a 4.00% annual percentage yield (APY) earning compound interest monthly, that would give you an extra $204 at the end of the year. Add $20 per month to the account and let it sit for five years, and you’ll have $7,431. Nice! That’s cash in your account for doing absolutely nothing.
Reducing Your Taxes
Here’s the part about how saving money makes you money, beyond interest you’ll earn. If you save money into certain tax-advantaged retirement vehicles, not only do you have that nest egg for later in life, but you can lower your tax liability.
By putting money into your employer’s 401(k), if available, you can lower the income on which taxes are assessed. If you are self-employed, there are various IRA (individual retirement accounts) that may allow you to put pre-tax dollars away for the future.
When you save money this way, you could even challenge yourself to put the tax savings back into a savings account. That’s a way to increase your money in the bank another notch or two.
Giving Back
Another reason why saving money is important is it can enable you to give back to others. When you have a cash cushion and aren’t living paycheck to paycheck, you have the opportunity to help those around you.
That might involve sending a few hundred dollars to a relative who has a big dental bill and is struggling to pay it. Or you might donate to a medical research cause, a disaster fund, or a local after-school program that you love. The choice is yours, but having a healthy savings account can make it possible.
Benefiting from Compound Interest
Another big incentive to save, as mentioned above, 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.
You saw an example above that involved putting money into a savings account at a bank. Now, consider investing: 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 7.00% 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 an online savings account, a certificate of deposit (CD), 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 the different types of taxes and deductions are taken out.
The difference between your monthly income and your expenses (everything from rent to student loan payments to food and dining out) 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. You might try following the 50/30/20 budget rule to help guide your spending and saving.
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.
Recommended: The Different Types of Savings Accounts
Common Places to Save Your Money
Where to put your money as you save? Consider these options:
• Savings account: You could put your money in a savings account at a financial institution, like your local bank branch. However, as outlined above, you may not earn the highest possible interest.
• Online savings account or high-yield savings account: These accounts are likely to pay a much higher interest rate than a conventional savings account while offering the same convenience and security as a traditional savings account.
• CD: A CD gives you a specific rate of interest but you must agree to keep your money in the account (that is, not withdrawing any of it) for a specific term, whether months or years. Withdrawing earlier could trigger penalties.
• Investments: There are many options here, such as Treasury bills and bonds. These can earn healthy returns and are typically considered safe places to keep money.
The Takeaway
Why is it important to save money? For a variety of reasons. It can provide peace of mind, open up options that improve your quality of life, increase your wealth due to compound interest and possibly lower your tax liability, and may even allow you to retire early. Many people earn wealth through a combination of working and savvy saving.
Looking for a smart way to save? Consider opening an online bank account with SoFi. Our FDIC-insured Checking and Savings account earns a competitive APY, and charges no account fees, both of which can help your money grow faster. And with Vaults and Roundups, you can track and grow your savings, assisting you as you aim for your personal financial goals.
3 Great Benefits of Direct Deposit
1. It’s Faster
As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.
2. It’s Like Clockwork
Whether your check comes the first Wednesday of the month or every other Friday, if you sign up for direct deposit, you know when the money will hit your account. This is especially helpful for scheduling the payment of regular bills. No more guessing when you’ll have sufficient funds.
3. It’s Secure
While checks can get lost in the mail – or even stolen, there is no chance of that happening with a direct deposit. Also, if it’s your paycheck, you won’t have to worry about your or your employer’s info ending up in the wrong hands.
FAQ
What are the benefits of saving money?
There are many benefits of saving money: It helps you save for your future, cover unexpected expenses, make major purchases, and have financial freedom. What’s more, the money you save can help make you more money, thanks to compounding interest and lowering your tax bill.
What are common things to save money for?
Common things to save money for are an emergency fund, retirement, a big purchase (like a car, a vacation, or the down payment on a home), and educational expenses, among others.
What happens if you don’t save money?
If you don’t save, you may lack financial security and the ability to meet certain aspirations. For instance, you won’t have a retirement fund and would therefore have to keep working indefinitely. You wouldn’t have money for a big purchase like a car or a home or your child’s education. Plus you wouldn’t be able to handle some expenses, whether planned or unexpected, and might have to take out a loan or use credit cards, which means you are paying for the privilege to borrow funds. That takes away from your earnings.
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