You’ve probably heard many times that it’s wise to save for a rainy day — but why, exactly?
After all, not everyone has a ton of extra money to put away. Can’t you simply use a credit card for big purchases or unexpected expenses, then pay it off later?
Although relying on a credit card for emergency expenses can work for some people, it can easily spiral into a debt problem with costly consequences if you aren’t careful. Building a savings fund, however, has many benefits that aren’t always obvious.
If you’re debating whether setting aside savings in your budget is worth it, here are five reasons why saving money is important.
If you lost your job, what would you do? How would you keep paying for your housing, bills, and groceries?
Even if your job seems stable, it’s an important scenario to consider. The Federal Reserve Bank of Minneapolis reports that nearly half of US adults couldn’t sustain their everyday expenses if they lost their income for three months.
That’s why it’s crucial to have some money set aside to stay afloat during financial emergencies, whether you’re laid off from a job, leave the workforce due to a medical issue, or lose a major client if you’re self-employed. An emergency savings fund can help cover essential monthly expenses so you don’t miss payments or rack up expensive debt while you get back on your feet.
You can also tap your emergency savings reserve for unexpected major expenses that can arise, such as medical bills for out-of-network care or costly home repairs.
Read more: The 4 best (and worst) places to keep your emergency fund
Saving money can also support you with non-urgent objectives that have a hefty price tag.
If homeownership is in your long-term plan, for instance, you’ll likely need a down payment. According to Redfin, the average homebuyer puts down 18.6% of a property’s purchase price; as of June 2024, the typical down payment is $67,500. Of course, it can take time to build up five figures in savings, but you’ll get there faster if you start now.
Read more: Saving to buy a house? Here’s where you should park your down payment money.
When you don’t have the cash to pay for an expense — whether planned or unplanned — you might consider borrowing the money instead. However, the cost of borrowing is steep and can result in further financial insecurity.
Borrowing money through a credit card or loan, for instance, incurs interest charges and potential fees, all of which increase the total amount you spend. For example, say you put a $1,000 purchase on a credit card at the average rate of 22% APR. If you took a year to pay it off, you’d spend an additional $123.13 in interest.
And if you opt to borrow money from friends or family, it can end up straining the relationship, especially if you don’t have a concrete plan for paying them back or fail to pay what you owe in a timely manner.
Having money saved reduces your dependence on borrowing and gives you the freedom to spend money on what you want with no strings attached.
Read more: How to pay off credit card debt when your budget’s tight
In a 2024 MarketWatch survey, 88% of respondents said they experience feelings of financial stress, with 47% citing a lack of savings as the culprit. Worrying about how you’ll manage a financial crisis is a heavy mental load to bear.
Saving money can have a positive impact on your mental health by providing a sense of control over your financial life and minimizing negative habits that may arise due to financial stress, such as procrastinating on important money decisions or ignoring your finances altogether.
Read more: 5 psychological money hacks to cut spending and increase savings
5. It sets you up for future stability and success
Maintaining a comfortable lifestyle in retirement requires proper planning and patience during your working years. It can be difficult to prioritize saving for something that feels so far off, but someday, you’ll want to retire — and you’ll be thankful you dutifully set money aside all those years for that purpose.
Retirement savings are a crucial part of your long-term financial stability. Putting money away in a retirement account — whether it’s an employer-sponsored 401(k), individual retirement account, or other tax-advantaged account — ensures your future self can live comfortably. And the earlier you start saving and investing, the easier it will be to hit your goal thanks to compounding returns.
Read more: Retirement planning: A step-by-step guide
Now you understand why saving money is important. But how can you increase your chances of success with saving? Here are some ideas.
A high-yield savings account is a great tool that lets you earn a high interest rate on your savings balance while maintaining easy access to your funds. Not sure where to start? Here’s our ranking of the 10 best high-yield savings accounts available today.
Consider asking your employer to divert a portion of your payroll deposit straight to your savings account. Typically, you can specify either the percentage or dollar amount of your paycheck that you’d like deposited into your savings each pay period. This removes the temptation to spend money that’s meant for saving.
If you’re new to saving money, don’t feel pressured to save big amounts right away. Starting with a small, recurring deposit – like $5 per week – can help you get in the habit of saving and gain confidence in the process. When you feel ready, you can slowly increase the size of your contributions.
To accelerate your savings efforts, review your discretionary spending and see what you can cut, like a streaming or unused fitness subscription. After canceling, pivot the money you would’ve spent on those services toward your savings fund.
Read more: Your complete guide to budgeting
Source: finance.yahoo.com