Top 7 Reasons to Save Your Money
You may have asked yourself why it's so important to save money. If you have enough to pay for everything you need, why should you worry about putting something aside each month?
There are a variety of reasons to begin or continue saving money. Different people save for different reasons, but in general, havings savings will benefit you in the future, whether you're avoiding hardship or going after the things you want. It makes saving easier if you have a clear goal or purpose for the money you are saving.
Here are seven reasons you should save your money.
It's important to have an emergency fund set aside to cover unexpected expenses. According to a 2019 Bankrate survey, only 18% of Americans said they could live off their savings for six months. In fact, nearly 40% would need to borrow money to cover a $1,000 emergency.
That emergency might be an unexpected car repair, expensive medical bills, or a sudden job loss. If you were to lose your job, you'd be thankful you socked away a good amount of money into your emergency fund to tide you over until you found a new job.
Ideally, your emergency fund should contain enough money to cover three to six months of expenses. The Bureau of Labor and Statistics estimates average yearly household spending at $61,224, or $5,102 per month. That means an emergency fund for six months should hold about $30,000.
Try to put aside at least $500 to start. If you are working to get out of debt, save what you can until you bring your emergency fund up to between three to six months' worth of income. If you are single or living on just one income, you may want to go with a larger emergency fund, because you don't have a buffer if that job is lost.
An emergency fund can also help you cover unexpected medical costs, which can pop up even if you have insurance. If you don't have the option to save in a health savings account (HSA), an emergency fund is your next best choice.
Another important reason to save money is your retirement. The sooner you start saving for retirement, the less you will have to save in the future.
Saving for retirement often takes place within special retirement accounts, such as a 401(k). Money invested in these special accounts has the potential to appreciate in value, earning interest. When that interest is compounded, it grows even faster.
For example, if you opened an account with $1, deposited $100 every month for 10 years, and earned 6.5% interest compounded annually, you'd have $16,195.18. Keep it up for another 10 years—20 in total—and you'll more than double your money to $46,593.89. If you started investing at age 25, with 30 years of saving $100 each month at a 6.5% rate of return, you'd have $103,656.45 (including compounded interest) by the age of 55.
Such a rate of return is not guaranteed, and you do risk losing your money by investing. However, historically the gains have all been positive, and with enough time in the market, even dips eventually recover.
If you have an employer-sponsored retirement plan, you should at least contribute up to your employer's match. Eventually, you should aim to contribute 10% to 15% of your gross income. You can contribute to your 401(k) as well as an individual retirement account (IRA).
Save money for a down payment on a house. If you can save up 20% of the purchase price, you can avoid private mortgage insurance (PMI) and receive better interest rates on a home loan. It can also reduce the amount you need to borrow, making your mortgage payments more affordable.
If you don't think you can save enough to put 20% down, you can still buy a home. Certain government-backed programs such as Department of Veteran Affairs (VA), Federal Housing Authority (FHA), and U.S. Department of Agriculture (USDA) loans accept very low down payments, and sometimes even no down payment at all.
You can determine how much to save towards a home each month based on your circumstances and other savings goals.
Where you save your money matters, too. Use a regular savings account, high-yield savings account, money market account, savings bond, or certificate of deposit (CD) to earn interest on your savings. When interest rates go up, your yield will go up as well.
However, as interest rates rise, credit card rates go up, too. Therefore, it's even more important that you have cash in savings in case of an emergency, so you don't have to rely on expensive borrowing to cover your bills.
Your savings account isn't only for things you need—it can be for things you want, too. Saving up for a big purchase beforehand means you won't pay extra in finance costs such as interest and fees, the way you would if you put these purchases on credit.
You might save up for a new car, paying for it all at once instead of taking out a car loan. Then you'll avoid having a car payment. You might even be able to negotiate a lower price by paying in full on the spot.
Or perhaps you're saving for a once-in-a-lifetime vacation or trip abroad. Having an exciting goal like this can make it easier to motivate yourself to put money away.
Sometimes, you know you'll have big expenses coming, even if you're not sure how much they'll be or when exactly they'll occur. To cover these, set up a sinking fund. Sinking funds are money you set aside for future, known expenses such as taxes, holiday gifts, car repairs, home improvements, and other irregular costs.
These extra savings can help prevent you from needing to dip into your emergency fund. After all, paying taxes is not an emergency—you know they're coming, and you can prepare.
Set the amount of your sinking fund based on the expected cost, such as with a home renovation, or the average of past costs, such as with car repairs.
Don't neglect to save money for your education. Higher education can improve your career prospects, but it comes at a cost: For the 2019-2020 school year, in-state tuition and fees at four-year public universities cost an average of $10,440 per year.
Think about saving for more than just tuition. If you will be attending school full-time, you may also want to save up to cover your living expenses to free up your time for your studies.
As you're setting money aside, you may also consider saving for your children's education, too. If that's the case, consider using a 529 plan. They're an attractive savings choice because the money grows tax-free. Depending on where you live and your particular situation, there may be other tax benefits, too.