Why Saving Money Is Important

Reviewed by Ebony HowardFact checked by Pete RathburnReviewed by Ebony HowardFact checked by Pete Rathburn

If you don’t earn much and you can barely pay your bills, the idea of saving money might seem laughable. When you only have $5 left at the end of the month, why even bother trying to save?

The reason: Saving money gives you options and peace of mind, and helps you meet life goals, cover emergencies, and prepare for retirement. Plus, the more you save, the easier it becomes to accumulate additional savings, thanks to compounding. This is because your investment generates earnings from its initial principal as well as the accumulated earnings from previous periods. Plus, everyone has to start somewhere. If you work at it, your financial situation is likely to improve over time.

Key Takeaways

• It can be hard to set aside savings, especially early in your career when your income may be modest, but starting early gives your money a chance to grow more over time, thanks to compounding.
• One reason to save is that it reduces stress, allowing you to worry less about things like making rent payments and paying your bills each month.
• Saving money also expands your options, so you can leave a job you don’t like, for example, to search for a better one.
• Realizing your dreams of owning a home, sending your kids to college, or traveling is another reason to start saving.
• It’s also important to set aside funds for the inevitable emergencies that will arise.
• Retirement, when you are no longer bringing in an income, has to be carefully planned and saved so that you don’t have to rely on your children or the government for assistance.

Reasons to Save

Peace of Mind

Who hasn’t lain awake at 3:00 a.m. wondering how they were going to afford something they needed? If money is really tight, you might be wondering how you’re going to pay the rent next week. If you’re a little further up the financial ladder, you might be worried about how many months you could pay the bills if you lost your job. Later in life, the money thoughts that keep you up at night might center around paying for your kids to go to college or having enough money to retire.

As you accumulate savings, your financial worries should diminish, provided you are living within your means. You’ll sleep better at night if you already have next month’s rent taken care of by the first week of the current month, if you know you can get by without work for three to six months, and if you have savings accounts for your children’s education and your own retirement that you’re regularly funding. The reduced stress from having money in the bank frees up your energy for more enjoyable thoughts and activities. Finding the best savings account is key to making sure that the money that you do put away earns you the highest interest.

Expanded Options

The more money you have saved, the more you control your own destiny. If your job has you on the verge of a nervous breakdown, you can quit, even if you don’t have a new job lined up yet, and take time off to restore your sanity before you look for new employment. If you’re tired of living in an unsafe neighborhood, you can move to a safer area because you’ll have enough for a deposit on a better apartment or a down payment on a nicer home.

No, money doesn’t solve every problem. If you are laid off, it might take as long as two years to find a new job. Some illnesses won’t go away no matter how many procedures you can afford, and random crime can happen even in a supposedly secure, gated community. But with more money in the bank to deal with issues like these, you give yourself better odds of coming out on top.

Life Goals

A home that you own. A child’s college education. A trip to visit your relatives in Asia. A comfortable retirement. These are all life goals that require funding. Starting a savings account is the first step in realizing your dreams, whatever they are.

Emergencies

Life is full of unforeseen circumstances, not all of them happy ones. Having savings can help you pay for emergencies that arise in every life, from flat tires to property damage from a flood or a severe storm. If you get sick, for example, and need expensive healthcare that your insurance doesn’t cover, having savings can help you pay for your care even if you can’t work during treatment. Medical debt is a common problem—in 2023, 30% of those with employer coverage and 33% of those in marketplace or individual-market plans or with Medicare were paying off medical or dental care debt, according to the Commonwealth Fund 2023 Health Care Affordability Survey.

To start an emergency or “rainy day” fund, first decide on a percentage of take-home pay that you can do without. It can be as low as 1% or 2%. The important thing is to save a set amount each payday and not touch it. Try not to skip a week or month, but if you have to, be sure to start again as soon as you can.

Retirement

Americans are generally not as financially ready for retirement as they should be. A Prudential study found that those who are about 10 years away from leaving the work world are critically unprepared, with most having less than $50,000 in median retirement savings. According to a 2024 AARP survey, 20% of those age 50-plus have no retirement savings at all, while 61% are worried that they won’t have enough money to see them through retirement. It is critical to set aside savings throughout your life to fund the period when you are no longer earning a living.

Note

“Silver squatters” is a term used for people age 55 and older who may be forced to rely on family for housing and financial help because they lack adequate funds for retirement.

Social Security payments can be helpful, but they are not intended as your only source of income during retirement. They are only expected to cover about 40%, on average, of your annual pre-retirement income, according to the Social Security Administration.

Make Your Money Work for You

Most of us put in hundreds of hours of work each year to earn most of our money. But when you have savings and stash your funds in the right places, your money starts to work for you.

What does that mean? When you’re first starting to save, you’ll want to put your money somewhere safe, where you can access it right away for unforeseen expenses. That means an online savings account, where you might earn 4%-5% interest annually. An online account can help you keep up with inflation, which tends to run around 1% to 2% per year but has been over 3% since April 2021. But you’ll have to pay taxes on your earnings. Anything is better than earning 0%, though, or not having savings and going into credit card debt, which will cost you 24.74% in interest, on average, per year, as of August 2024.

Once you’ve saved three to six months’ worth of expenses in your emergency fund, you can start saving money in a tax-advantaged retirement account. That’s where the magic starts to happen. These accounts, such as a Roth IRA or 401(k), allow you to invest in the stock market. You won’t pay any taxes on those investment gains along the way, which will help your money grow even faster. With a Roth IRA, you contribute after-tax dollars, and everything that’s in the account after that is yours to keep. With a 401(k), you get to contribute before-tax dollars, giving you more money to invest upfront; you’ll pay taxes when you withdraw the money in retirement. (If you’re not sure whether it’s better to pay taxes now or later, you can hedge your bets and contribute to both your employer-sponsored retirement plan and a Roth IRA.) The third choice, a traditional IRA, allows you to contribute before-tax dollars as you do with a 401(k).

If you have a high income and low expenses, you might accumulate enough to retire in 10 years. For most people, it takes closer to 40 years. But at some point, if you save and invest regularly, you should be able to live off the income generated by your investments—the saved money that’s working for you. The earlier you start, the more time a small amount of money has to grow large through the miracle of compounding.

How Can I Start Saving?

The first step in saving is having a budget so you can understand how you’re spending the money you earn with each paycheck. (There are lots of online templates that can be helpful in setting up a workable budget.) You’ll need to figure out the costs of your needs—rent, food, utilities, transportation—which must be covered first, followed by your wants—more expendable items like clothing, dining out, and entertainment. The more you can whittle down your wants, the more you’ll be able to save.

What Is a High-Yield Savings Account?

A high-yield savings account is a type of account where you can earn as much as 10 times—or more—the national average of a standard savings account. Online banks often offer these savings accounts.

Should I Join My Employer’s 401(k) Plan?

It’s a good idea to join a 401(k) plan if it’s available to you and to contribute as much as you can to that account. If your employer has a match, be sure to contribute at least as much as is needed to get the match. A common match is 50% of what you put in, up to 6% of your salary.

That money is free to you and can help your funds grow over time. In 2024, the maximum you can contribute to a 401(k) annually is $23,000 unless you are over age 50, in which case you can make an additional “catchup” contribution of $7,500.

The Bottom Line

Saving money is incredibly important. It gives you peace of mind, expands your options for decisions that have a major effect on your quality of life, and eventually gives you the option to retire. Most people who are wealthy got there through a combination of their own hard work and smart savings and investment decisions. You can become one of those people, too.

Read the original article on Investopedia.