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 even if you plan to start putting away cash someday, why should it be something you prioritize now?
For many people, it can be hard to muster up any extra funds after paying for the daily necessities of life. Housing, healthcare, and childcare have all gotten more expensive in recent decades, and most young people are struggling with mountains of student loan debt.
Then there are other things you can’t do without, like food, clothing and toiletries. And most people want to have some fun on occasion, which can mean paying for bar tabs, concert tickets or vacation flights.
In light of all these expenses, storing away cash can feel like an impossible dream, or something that requires too much sacrifice.
Even if you theoretically want to try saving, it can be tough to figure out how to achieve it in practice. Understanding why saving is actually important — and how to make it happen — might be the fuel you need to get started.
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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.
One major benefit of saving is the potential to avoid debt. Life is full of surprises, from being laid off, to breaking up with your partner, to running into unexpected medical bills, to suddenly having to care for a dependent.
If you don’t have any money saved, these situations have the potential to upset your financial plans. Some may have to turn to high-interest credit cards or payday loans. With an average interest rate of 16% as of June 2020, even a modest credit card balance can quickly balloon into unsustainable debt.
If you miss payments, your credit score could suffer (making it harder to take out loans with good terms down the line). Many recommend building up an emergency fund of at least three months worth of living expenses to prepare for financial surprises.
Saving is beneficial for non-emergencies, too. Say you have a major expense on the horizon, whether that’s a wedding, big vacation, home renovation or sending a kid to college. You could finance these big-ticket items with debt, whether through 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 this issue, which can help save a significant amount of cash in the long run.
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.
Let’s use an example from financial expert Suze Orman. If you start putting just $100 a month into a retirement account when you’re 25 years old, and do so for 40 years, you’ll have just over $335,000 by the time you retire at 65 (assuming an 8% average annual return).
If you start doing the same thing at age 35, you’ll only have $146,000 or so by the time you’re 65. As she told CNBC, “Those 10 years just cost you $200,000.” That’s a pretty good incentive to start saving as soon as possible, even if you start small.
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 owe, what you spend 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? Get a clear sense of how much you need to stash away and by when.
The point of this is two-fold: 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 or money market account.
That’s because you’ll need access to it, and you don’t want to risk losing money in a short-term downturn. 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. For a month or two, take note of all your expenses. Then, you can make a monthly budget that reflects your average spending. Include fixed expenses — the ones that stay the same each month, like rent and utilities — and discretionary expenses — like eating out or a gym membership.
Next, take note of your net monthly income, meaning what goes into your account after taxes and deductions. The difference between your monthly income and expenses is what you have leftover to save. If there’s not enough leftover, you can work on finding ways to cut spending or increase your income.
Putting your 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.
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