You've probably been told since you were a child that it is important to save money. But do you know what the reasons are for saving money?
I'm sure you can identify several reasons why you should save money. We'll cover those and hopefully, some others that you haven't thought of before.
We'll also discuss if there is ever a reason not to save money.
Saving money should be a part of your financial plan. It is best to have specific goals for your savings, as well as debt reduction, retirement, and other major financial milestones.
It is also an excellent strategy to put your savings on autopilot.
How do you do that?
Each time you are paid, either have your money direct deposited into multiple accounts or have an automatic bank transfer set up to move funds as soon as you receive your paycheck.
By doing this, you are paying yourself first and removing the temptation to use that money if it is in the account you usually spend money from.
But we'll talk about that a bit more as we go through the reasons, as well as some other helpful money saving strategies.
One thing to note – I am not differentiating between saving money and investing money throughout this article. Saving money in a savings account isn't going to grow your wealth much, especially vs. inflation.
However, when deciding how to save or invest your money, you need to weigh the potential risk involved vs. the time you'll need access to the funds.
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15 Reasons to Save Money
I'm going to list these reasons in order from what I think is most important to the least important.
However, everyone's financial situation is different, so your order of importance likely won't be the same as mine. And that is perfectly okay.
1. Emergency Savings
According to this CNBC article, 41% of Americans could handle a $1,000 emergency. While that isn't as bad as I expected, the average unexpected expense those surveyed encountered was around $3,500.
More troubling is that 16% would deal with the unexpected expense with a credit card and pay it off over time. And 14% would borrow from family or friends.
Unfortunately, that article was written in January 2020, just before the coronavirus shut down America. And millions of people lost their jobs.
So while many may have had good intentions, they may have been prepared for an unexpected $1,000 expense. But many were unprepared for the unexpected situation so many faced.
The effects of the pandemic help illustrate the importance of having an emergency fund. And why it is my top reason for saving money. But having one is just as important when your car breaks down, your refrigerator stops working, or you have a medical emergency.
While three to six months of living expenses is the typical amount recommended to have in an emergency fund, that can seem like a huge number when you're just starting out saving.
Don't let that stop you. Start saving what you can now by setting up automatic transfers to a high-yield savings account, as I discussed earlier. Over time, try and increase this amount, and it will grow over time.
2. Paying Little to No Interest (Reduce Debt)
Other reasons for saving money on this list are going to have a similar principle to this one. You want to avoid paying interest where possible.
Saving money for larger purchases, like a new TV, a bike, or a new appliance, helps avoid using credit for these purchases.
Not only will you save money by not paying interest on your credit card, but you can also earn interest while saving for your purchase.
You may ask, “Isn't that what my emergency fund is for?”
No – it is not. Your emergency fund is for unexpected expenses.
If you plan to buy a new TV or replace an aging appliance (before it breaks), that is not an emergency.
It is a planned purchase that you should save for in advance.
And just to be clear, I'm not saying you can't use credit cards.
In fact, I recommend using them. Using credit cards is great for earning rewards like free travel or cash back.
I recommend that you don’t use your credit card for purchases you don’t have savings or income to cover when the bill comes due.
So eliminate your credit card debt so you aren't paying interest, and pay your credit card bill in full each month.
3. Retirement (Top Reason to Save Money if You're Young)
When it comes to reasons for saving money, retirement should be towards the top of your list.
Why save money for something that is potentially decades away?
The power of compound interest is the answer.
The following table illustrates how much money you'll have at age 65 by investing only $100 per month.
As you can see, it pays to start early. And, for this example, the total amount invested when starting at age 20 is $54,000. This chart illustrates it even better:
And the more you can save each month will only increase those numbers.
My mother taught me that lesson when I was younger, and, while I'm doing okay for myself, I could be doing so much better if I hadn't forgotten it along the way. I'm going to do my best to ensure my children don't forget it.
If you are young and reading this article, the power of compounding interest is the most important takeaway.
When I say it is the top reason to save money when you're young, it doesn't just mean for retirement. Saving when you're young in both tax-advantaged retirement accounts, as well as taxable accounts, is essential for long-term financial independence.
If you haven't started saving for retirement yet and don't have a retirement plan at work, Acorns is an excellent way to get started.
Don't Miss Out on Free Money
One other vital point regarding retirement savings, and why it is such an important reason to save money is employer matches.
Many employers will match a certain percentage of 401(k) contributions.
If your employer does this, at the minimum, ensure your contributions are high enough to receive all of the matching contributions.
By not taking advantage of this, you are turning down free money. Don't do this!
Additionally, many employers also match contributions for Health Savings Accounts. You'll want to take advantage of this benefit as well, if available.
4. Down Payment for House
If you dream of homeownership one day, saving money for a downpayment is a significant financial goal.
A larger down payment will result in you borrowing less money. By doing this, your monthly payments will be lower, and you may qualify for a lower interest rate, lowering the overall cost of your mortgage. It may also help you lower or avoid paying private mortgage insurance (PMI).
However, keep in mind that saving up for a sizeable down payment can delay other financial goals. It also could impede the ability to buy a house when the market is in your favor.
5. Home Repair Costs
Unfortunately, when you own a home, you are also responsible for upkeep.
You should typically save at least one percent of your home's value for annual maintenance costs.
Not addressing maintenance around your home each year will likely cost you more in the long-term. So it is vital to keep your home properly maintained.
6. Annual Expenses – The Reason to Save Money for Your Budget
People new to budgeting often make a crucial mistake. They capture all of their monthly expenses, but they forget about significant, infrequent costs.
Examples include homeowner's insurance, car insurance, property taxes, and annual memberships.
The best way to handle these expenses is to account for them in your monthly budget. Divide the total annual cost by 12 and set aside that amount each month, so it is ready when the payment comes due.
I like to have separate savings accounts for different expenses, so it is obvious what it is for, and it isn't touched for anything else.
This practice is similar to how a mortgage company handles your escrow account. You pay additional money each month that they set aside. When your homeowner's insurance and property taxes come due, the mortgage company pays it out of this account.
This strategy is exactly how you should handle irregular expenses throughout the year. Spread them evenly throughout the year, so you aren't surprised by a substantial bill.
Hopefully, you don't have a car payment, but chances are pretty good you do.
Imagine not having that payment. You could do a lot with that extra cash each month.
But you probably do need a car. So, first, it is best to pay your current one off if it isn't already.
Next, you should be saving money each month, as discussed above, for maintenance, insurance, and registration fees.
If you see yourself needing a new (or even better, slightly used) car in the next few years, it is prudent to start saving for it now.
If you can save for the whole amount, that is excellent. But any amount you can pay upfront will help reduce that monthly car payment and free up that money.
8. Vacations – A Fun Reason to Save Money
Getting away from everything and relaxing is money well spent in my mind.
However, taking a vacation with money you don't have can result in even more stress when you return to the real world.
Having a vacation fund is a great way to avoid this.
And again, I recommend having a separate savings account just for vacations (see a pattern here?).
Also, don't forget about having some extra money for spending while on vacation. And for any unforeseen emergencies along the way.
Having children is a big decision. But a lot of times, people think about all of the cute moments that come from having babies and little kids – nd watching them grow throughout the years.
What they tend to forget about is that kids are expensive.
According to a report by the USDA, the average cost of raising a child is $233,610!
And that doesn't include college!
So before you decide to grow your family, make sure you've prepared your finances.
And keep in mind, that is the average cost.
If you require childcare, prefer private schools, or plan to raise an Olympic gymnast, those costs will increase significantly.
Yikes! It already costs over $200K for kids, and that doesn't include college?
The average total cost of college is $122,000.
No wonder there is so much student debt in the United States.
It is expensive, but the good news is you can plan for it.
The best way to get ahead of college costs is to start saving when your kids are just babies. That gives you the time advantage to use the power of compound interest.
And you can also work to reduce college costs. Consider attending an in-state public university instead of a private school or out-of-state public school. Additionally, apply for scholarships and financial aid.
However, don't put college savings for your children ahead of your retirement savings and other financial goals. While you want to avoid student loan debt for your children, you don't want to run out of money in retirement.
Whether you are saving for your own wedding or your children's wedding, you know they are expensive.
Weddings can easily cost 25-30 thousand dollars, and sometimes double that depending on how extravagant they are.
Like anything else, the earlier you start saving for it, the easier it will be.
And while you want it to be a memorable event, try and remember that the memories you make will be with the people there and not the material surroundings.
Additionally, there are several areas where you can save money on your wedding. Cutting down on the invite list, having an off-season wedding, cut back on the alcohol offerings, have a DJ instead of a band, or just elope!
12. Achieving Financial Freedom
Achieving financial freedom is an excellent reason to save money.
But what exactly does that mean?
While some people may attempt to define what it is, financial freedom is really determined on a personal level.
Financial freedom to one person may mean being debt-free and having a job they enjoy with no financial pressure to make more money.
Others may feel financial freedom means they don't even have to work anymore, or becoming independelty wealthy.
Regardless of your definition of financial freedom, addressing the other reasons for saving money on this list will likely go a long way toward achieving financial freedom.
Using Personal Capital is an excellent way to track your net worth as you work towards financial freedom.
And achieving financial freedom helps with the following reasons as well.
13. Start a Business
Many people dream of starting their own business.
However, starting a business is difficult in the beginning. And you likely won't turn a profit early on, so saving money is essential in preparing to do so.
Running a business will be stressful enough; you don't need to worry about paying your bills also.
But longer-term, starting a business can be an excellent move. It can fulfill your lifelong dreams and provide a path to financial freedom.
14. Passing Money On to Others
Beyond saving for things in your lifetime, you may wish to pass it on to others after you pass.
Leaving a financial legacy by passing money on to your kids, other family members, or charity is important to many people.
Whether it is providing opportunities to others that you never had or giving money to causes that have a deep meaning to you, leaving money to others can have a positive impact long after you're gone.
15. Reduce Financial Stress
While this reason is listed last, it easily could be the first reason for saving money.
Let's face it – financial issues cause some of the most stress throughout our lives.
By addressing the areas discussed above, you can significantly reduce the amount of financial stress in your life.
And by reducing financial stress, you can live a better life, have a happier marriage, and raise financially-smart kids.
Reasons Why You Should Not Save Money
So we covered all of these reasons to save money, but are there any reasons not to?
This is a complicated subject that could be argued in many ways.
However, I'm going to look at it a bit more simplistically.
The only reason I could see why you shouldn't save money is if you don't have any future financial obligations, nobody relies on you for any financial support, and you have a terminal illness and will have no need for money in the future. And even in this extreme circumstance, you'd need some money.
I hope that's not the case, but I think it requires extreme and unlikely circumstances for anyone not to have a reason for saving money.
The other arguments really depend on how you save your money.
If you stash all of your money under your bed, the value of your money will decrease because of inflation.
Additionally, if you are saving money that could be going towards higher-interest debts, you could save money by diverting the money you're saving towards those debts. But this doesn't mean you shouldn't still work on your emergency savings.
And counter to that example, there is an argument that instead of paying off your low-interest mortgage early, you should invest that money in the stock market where you'd earn more money than you'd save paying down your mortgage.
In the end, I have a hard time arguing against most of the reasons I listed for saving money.
With all that said, everyone's financial situation is different. And what works for me might not work for you.
So if you are struggling to figure out how to manage your money and need help, you should consult a financial planner.
Frequently Asked Questions About the Reasons for Saving Money
What Are the Disadvantages of Saving Money?
While saving money is an excellent idea, some disadvantages go along with it. When you are saving money, it can be difficult not to touch it.
Knowing all of that money is there and available to you to spend is hard for many people. But you need to keep your goals in sight. When you have the urge to dip into that savings, think about how you'd feel if you don't achieve the goal it was meant for.
Additionally, you may have to put off purchases for longer than you'd like. But keep in mind that by using your finances this way, you'll be avoiding paying additional interest charges. And the money saved from that helps you achieve your next goal quicker.
What Are the Benefits of Saving Money Early?
The section on retirement savings above should explain this pretty clearly.
The earlier you start saving, the more time you have for the power of compounding interest to help grow your savings more and more.
A similar question would be, “When should I start saving for retirement?”
And the answer is as soon as possible.
I know it is challenging to think about retirement when you are in your twenties, but as the compounding interest chart above shows, it makes building a substantial nest egg a much easier task than if it is delayed.
Where Should I Save Money?
Where you should save your money depends on your goal timelines and your risk tolerance.
Typical savings accounts pay such little interest that they are not useful for building wealth. However, that doesn't mean you shouldn't use them.
Regular savings accounts are suitable for saving money for irregular bills you have.
The next step up is high-yield savings accounts and money market savings accounts. These accounts are ideal for your emergency fund and other intermediate savings goals.
And for longer-term goals like college and retirement, you'll want to invest in stocks and bonds. The mix of your investments should become less aggressive the closer you get to when you'll need the money.
Obviously, these aren't the only places you can save your money, but that deserves its own post.
And again, if you aren't comfortable with figuring out how to handle your savings vehicles, you should speak to a financial professional.
Is It Good To Save Cash?
Having large amounts of money saved as cash is not a great strategy. First, that money will lose value over time due to inflation. Also, you want to ensure you have a safe place to store it.
If you have a bunch of cash stored in your house, you could lose it to theft or fire. At the very least, have a fireproof box or safe to store any significant amount of money in your home. These boxes are perfect for other valuables like jewelry, important documents, and passports.
While saving cash at home shouldn’t be a significant part of your financial strategy, it is good to keep some cash on hand for emergencies.
If there is a natural disaster or anything else that prevents you from getting money out of a bank or ATM, you need access to cash to get you through the crisis.
The amount will depend on how well you are prepared in general for something like that, but a few hundred dollars is the minimum I'd recommend.
And don't have a bunch of fifty or hundred dollar bills. If there is a widespread problem accessing financial systems, you'll want bills of lower denominations available to use.
Summary of the Reasons for Saving Money
While money can't buy happiness, it sure can make life a lot easier and lead to living a happier life.
Saving money can help significantly reduce the amount of stress in your life and make you happier. Having sound financial goals and working towards them with a solid saving strategy enables you to be prepared for unexpected financial hurdles. Saving money is important, and so is understanding your liquid net worth.
And don't forget to check out Personal Capital to track your net worth and keep an eye on all of your accounts. I use it, highly recommend it, and it is free to use!