Saving money is, by far, the most important yet underrated skill you need to reach financial independence. Unfortunately, thanks to credit cards, it’s easily possible to live beyond one’s means, which hinders financial progress. The solution, of course is to pursue a lifestyle you can afford, which is mainly accomplished by wisely budgeting and saving your money.
However, despite their importance, we often fail to set and meet saving goals, which is reflected in the fact that around 50% of Americans do not have enough savings to cover the next month’s expenses, should they lose their jobs today (source: Market Watch). Our lack of creating or prioritizing saving goals could be due to anything from ignorance about saving tools to ignorance about the value of saving itself, which is why today’s article talks about why you should start saving money right away by spending less of your income.
1. Save for an Emergency fund
Unexpected expenses can dent your wallet and smudge your budget in a fleeting moment of bad luck. A storm may damage your roof, a road accident may damage your car, a dependent’s health condition may deteriorate or you may get laid off. To meet these unexpected expenses without going bankrupt or incurring large amounts of debt, you need an emergency fund, i.e. backup money.
Although the amount of money you put in the emergency fund has no upper limit, the minimum benchmark should be around 5 or 6 months’ worth of expenses, tucked away in a bank account that you do not have easy access to. You could also simply put in half a years’ worth of salaries and stay away from the money until you need it desperately – the rule of thumb here can be that the money in your emergency fund should not be used for consumption purposes. Once you withdraw money from it, replenish the amount as soon as possible. Remember to add more money to it over time.
We wrote an article about three benefits of emergency funds last year. Have a look if you’re interested.
2. Save for your retirement
America is certainly not saving up enough for retirement. According to CNBC, 1 in 3 people have less than $5,000 saved up for their retirement, which is rather unfortunate. When it comes to retirement planning, the earlier you start saving, the better. Post retirement, your medical expenses will undoubtedly climb up as your income diminishes or halts altogether, so you need to have enough to not only foot your medical bills (even if you have health insurance because the coverage may be limited) but also maintain a certain lifestyle. Some ways to support the bill for your retirement are 401 accounts (which we blogged about last year), provident funds, old age benefit schemes and stock market purchases that you can reap the dividends of after retirement.
There are also many ways to limit your medical expenses, whether you have retired or not, and if you are late to the party, there are many ways you can speed up your retirement savings, as discussed in this post.
3. Save money to buy an asset
One of man’s most basic needs is shelter, and whether you decide to move into your own home or rent a house/apartment, you need money to put a roof over your head. You may think that renting a property may not require dipping into your savings, but the fact is, lease agreements often ask for substantial security deposits as well as two months’ worth of rent.
Let’s say your housing situation has been covered, you still need other assets to go about your daily activities, such as a car, electrical appliances or even furniture in your house. All of these require money that you cannot always readily provide from one month’s salary and are more expensive to purchase via credit cards or leasing arrangements, which means you lose money because of interest charges. The safest way, therefore, is to save money for the purchase and make a lump-sum payment to get the lowest possible price for your asset.
4. Save money to pay off debt
The ubiquitous nature of credit-oriented financial tools has made debt an acceptable part of life, but that leaves consumers extremely vulnerable to economic shocks and other problems.
Because outstanding debt quickly multiplies over time (thanks to compounding interest calculations), many financial analysts advise clients to pay it off as early as possible to avoid the corrosion of one’s financial assets. Debtors can use their savings to pay more than the minimum monthly installment so the loan is paid off faster than the stipulated time as per the repayment schedule.
The average American owes around $40,000 in personal debt (source: CNBC) and that is way too much debt to be comfortable with, especially considering the massive amount of interest charges that add up to your payments each month and each year. It really should be a top priority to set aside as much money as you can at your debt repayment schedule so you can begin to accumulate wealth. Some financial experts suggest you pay off high-interest rate debt first, while others feel it’s better to start with small-sized debts, whichever you choose is best for you, remember that each month that you fail to repay your debts, compound interest rates are eating away at your bank account, which includes any money you had saved up for emergency purposes. Therefore, if you hold debt, short-term debt specifically, work towards paying it back using the money you save up every day.
5. Vacation time!
Everyone needs a break, even if they don’t have a habit of wandering across the planet and enjoying the diversity. There are lots of ways to go on holiday while on a budget, but that doesn’t mean you can manage to finance your trip solely on your monthly income. If you wish to have a fun, well-deserved, guilt-free vacation, start saving money for the holiday today. Make room in your budget for a ‘vacation fund’ and add to it regularly over time. To motivate yourself further, turn it into a goal by putting your destination in the title of the category, as in ‘Disney 2019 Vacation Fun’ or ‘Venice 2020 Fund’.
6. Save for education and other future goals
Studying at graduate and post-graduate level is expensive, which means, unfortunately, college education is rarely obtainable without the help of student loans. The pressure of paying back these loans once students graduate can be financially crushing. We wrote an article sharing 11 tips for attending college without using student loans, and one of the tips we discussed was to start saving money for college as early as possible.
Even if you are done with all your educational goals, you may need extra backup money for other financial commitments in the future, such as your wedding, or your children’s education that you may wish to partially or fully fund.
If parents help support their college-going children, the burden of student debt can be eliminated to a great extent and allow graduates to focus on building their careers as soon as they get their degree.
We wrote an article about different student debt relief options that you may find helpful.
7. Save money to increase your income
There are three ways your savings can, in turn, help you increase your income:
- Put your savings in an interest-earning bank account, where you can earn additional interest income on your savings,
- Use your savings to invest in the stock market and make money through dividend income or by selling your shares at a profit (buy at a low price and sell it at a higher price),
- Invest your savings in income generating asset, such as a rental property (buy a house and put it up on rent) or a rental car (buy a car and hire a driver to use it on Uber or some other transport app).
This additional income can be saved, used up for various purposes or reinvested, which will get you even more money.
8. Save for financial independence
Financial independence is defined as having enough wealth / assets / money so that you can continue to live without working, and this pertains to your retirement. There are plenty of people who work despite reaching financial independence, purely for the fun of it, which is a wonderful way to spend your days. Either way, to reach financial independence, you must be able to save money, lots of it, which you you either put aside in a savings account or invest in various income-generating assets. Once you achieve your financial independence goals, you can support your lifestyle with your savings, or income from investments (such as stock returns or rental income from real estate investments) so your reliance on debt is zero when it comes to meeting basic necessities of life. If you cannot increase your savings by earning more, the only alternative is to save more by cutting your expenses.
9. Peace of mind and bliss
The ultimate goal in life is undoubtedly, happiness, and even though money cannot buy happiness, money worries can rob you of your peace of mind. This is because a lack of money is linked to dozens of other worries about your food, shelter and health. The truth is, more money does not directly lead to happiness, but that is not to imply that money is not a necessity. When you worry about what you will eat the next day, whether you can pay off your debts, how you will get your tooth ache treated and where you will live after your landlord evicts you next month, your mental health is bound to deteriorate. But if your bank balance promises to resolve all these problems, you can promptly check financial worries off the list and appreciate your blessings – that you have a warm meal in front of you, that you can get your medical problems treated, and so on. These conveniences may seem minor but are blessings indeed. In addition to this, when you no longer worry about money, you have time to focus on more things that give you a reason to smile, like positive relationships and memorable experiences.
When you save money and place it in emergency funds, savings accounts, sinking funds and build a healthy, well-padded financial nest for yourself, you have the comfort of knowing that whatever life throws at you, with a good backup stash of savings, you will be able to handle the monetary aspect of any foreseeable problem.
10. Save to support your family
If you plan to start a family one day, you will definitely need to dip into your savings to pay for your children’s needs from the day they set a soft foot on this earth. Food expenses, clothing expenses and education costs all need to be covered by parents up until children reach young adulthood. With a positive inflation rate being an integral part of our economic system, prices will continue to rise and the cost of addressing your needs and the needs of your family will go up year after year. At the same time, there is no guarantee that your salary will rise accordingly.
Save yourself the financial worry of not being able to support your family without relying on debt, and start saving today.
Now that you have read through the various reasons it is vital to save your money regularly, you may be interested in reading how to save quickly and methodically. Remember that it is normal to experience a personal finance burnout when you begin to save money, but there are ways to motivate yourself to continue your efforts to spend less and save more, as mentioned in the article.