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 some money 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. Saving money may also be easier if you have a clear goal or purpose for it.
Here are several reasons you should save money now.
Save for Your Emergency Fund
It's important to have an emergency fund set aside to cover unexpected expenses. Studies show that four in 10 adults in the U.S. would need to put an unexpected $400 expense on a credit card or would need to borrow money from family or friends to pay for it.
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 the average household spending in 2020 was $61,334, or $5,111 per month. Using that as an example, an emergency fund that covers six months' worth of expenses should hold about $30,000.
That's just an example. Save as much as you can to get started, and over time your fund will grow. If you are working to get out of debt, save what you can until you bring your emergency fund up to even just one month's worth of income. If you are single or living on just one income, you may want to consider a larger emergency fund, since you might not have a buffer if you lose your job.
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.
Save for Retirement
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 after 10 years. 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 try to 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 for a Down Payment on a House
Save money for a down payment on a house. If you can save up 20% of the purchase price, you can avoid paying 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 the Department of Veteran Affairs (VA), Federal Housing Authority (FHA), and U.S. Department of Agriculture (USDA) loans accept lower down payments, and sometimes even no down payment at all.
You can determine how much to save toward a home each month based on your circumstances and other savings goals.
Save To Maximize Interest Rates
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.
Save for a Vacation, Car, or Other Big Purchase
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.
Save for Irregular or Recurring Expenses
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 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 saving money for education, whether it's for yourself or your family. Higher education may improve career prospects, depending on the industry, but it comes at a cost. For the 2020-2021 school year, the average cost of in-state tuition was $9,580, while the average cost of out-of-state tuition was $27,437.
If you're saving money for your children's education, consider using a 529 plan. That is 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.
Think about saving for more than just tuition. If you or a family member will be attending school full-time, you may also want to save up money to cover living expenses and more.
Frequently Asked Questions (FAQs)
Why should you start saving early?
The beauty of time is that you get the benefits of compounding interest. The earlier you start to save, the longer your money has to grow, and the less catching up you have to do as you get older.
What are some good ways to save money?
Pay yourself first. That way, you will always be putting away a percentage of your income. Put money in an account you cannot easily access, such as an employer-sponsored 401(k). Pay cash instead of running up a credit card balance. Stock up when essentials are on sale.