Why is it Important to Save?

Saving money is important but it is a challenging task to achieve. Saving money requires your commitment and hard work and it takes time to develop, needs to be learnt, and brings benefits that will endure for the rest of your life. There is more to saving money than to spending less and it is important to also set realistic goals, keep your spending in check, and get the most for your money.

We are not able to predict the future and so we are not able to know how much money we will need. Understanding the importance of saving money is vital and it is also a key component to your success in saving. Here are a few reasons to consider on your journey to saving your money:

Retirement

If you are young, you may not see or understand the need to save for your retirement however, starting early is the smartest and easiest way to go about it. Over time, your savings will add up and earn more interest from the bank. Having a retirement fund in place will give you peace of mind and as it grows, you may even be able to consider retiring earlier than you might have planned.

The example below illustrates why it is important to start saving early. The sooner you start to save, the greater the benefits of compound interest. Compound interest is the interest earned on reinvested interest, in addition to the original amount invested.

Example: Two students, John and Alice, are both 22 years old. They each have an extra $2,000 a year to invest or to spend as they choose. John opens an Individual Retirement Account (IRA) to start saving while Alice chooses to spend her $2,000. John’s IRA earns 12% per year and he saves $2,000 per year for six years and then never puts another cent into his IRA. Alice spends her $2,000 per year for six years. After that time, she invests $2,000 per year until she is 65 years old. Alice earns the same 12% interest per year that John does.

The chart below shows the value of John’s and Alice’s respective IRAs, from the time they are 22 years old all the way to 65. Keep in mind that John’s total investment is $12,000 ($2,000 per year for the first six years), while Alice’s is $74,000 ($2,000 per year for the last 37 years).

The above chart clearly illustrates the benefits of starting to save early. Instead of spending your extra cash at a young age, put it into saving and reap the benefits later in your life. It is never too late to start – so plan for your future today and SAVE!

Emergencies

Emergency funds allow you to pay for unforeseen problems without going into massive debt from loans or credit card bills. These emergencies may include both small and big events such as, replacing a household appliance, car repairs, medical bills, home repairs, recession and job loss. You may have insurance to cover some of the emergencies however in many cases there may be a delay or an issue getting the money from the insurance company in time to deal with the emergency.

Experts agree that you should set aside enough money to cover your cost of living for at least three months, but preferably up to six months. In this way, you will have sufficient time and money to deal with the emergency.

Average Life Expectancy & Social Security

With more advances in medicine and public health today, people are now living longer. This means that you may need more money to get by. It is important to have money saved and to ensure that you are not relying on Social Security as a form of income. Social Security should be treated as a supplement to your income. By saving money you will ensure that you have money until the end of your life.

Children

For many parents, contributing to their children’s lives is very important and rewarding. You may want to pay for their education and other defining moments in their lives, such as buying their first car or contributing to their wedding. By providing for your children, you are also providing them with other advantages. For example, by paying for your child’s education, they will be able to attend college and have better opportunities for employment and also they will not need to worry about paying off college fees. The costs for private and public education are rising every year, and it is getting tougher to meet these demands and so saving in advance for education, will make it easier for you to make the necessary payments and provide for your children.

Luxuries

Everyone wants to splurge on things sometimes, but this is tough to do when there is little money available. Saving up now for that new kitchen, family vacation, or even a romantic getaway for two means that you will have the funds for these non-essential yet important expenses.

So start saving now and also educate your children from a young age about saving and the benefits. Instead of taking out a loan or putting large expenses on your credit cards, put some money aside every week or every month until you reach your goal and can pay cash for what you may want or need. How much you save has little to do with your income but has a lot to do with whether you want to save and if you are willing to make the necessary adjustments to boost your savings. Saving money is about spending less than you earn and the time to start saving is now…

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