Not convinced saving money is for you? Keep reading, because, in this article, I’m going to give you 22 reasons why saving money is important to building wealth.
This article will lay out the reasons why saving accounts are important, why teens and students should start saving now, and why it’s important to save for the future, and more.
So, whether you’re a college student looking for answers, a young professional looking to start saving, or a seasoned saver looking for inspiration, you’ll love these tips, advice, and strategies.
Let’s get started!
The Importance of Saving Money [Definitive Guide]
But if you don’t make enough money to even pay your bills, saving money is nearly impossible.
So, what can you do?
Well, you can either increase your income or decrease your expenses. If you do at least one of those two things, then you’ll be able to start saving money. It might take some time, but if you work at it, your financial situation will improve over time.
Saving money is worth the effort. The more you save the easier it will be to accumulate more savings. But you got to start somewhere.
So, here are the 22 reasons why you should start saving money.
Importance of Savings Account
1. It Can Wean You Off Credit Cards
When you have money in your savings account, you don’t have to depend on loans to handle unexpected emergencies. Having savings set aside helps to avoid using credit cards and paying interest on your purchases.
Here’s how you can stop using credit cards. Start by putting away 1-2% of your income in a savings account for ‘fun money’. You don’t need any particular goal, just put it away.
Later on, you’ll see something you want. If your fun money balance can support it, buy it, and treat yourself. If not, continue saving until you have enough money.
2. A Place to Put Your Emergency Fund
You should have about three to six months of living expenses in a savings account as an emergency fund. Sure, you might have that amount or more in your 401(k) or other retirement accounts, but that money is not easily accessible.
Even if it was, that money isn’t supposed to be used for emergencies anyway. That’s why having a dedicated savings account for emergencies is important to withdraw money immediately if you needed. Having a savings account means you won’t be charged taxes and fees for withdrawing your money like you would in a retirement account.
3. Savings Accounts are Safe and FDIC Insured
It’s never a good idea to keep a large sum of money at home because of the risks. Your home could be robbed or catch fire. Most homeowner or renter insurance will cover cash, but only up to a very low limit like $200. After that, once it’s gone, it’s gone. If you keep your money in a savings account, even if the bank burns down, you won’t lose your money.
This is because your money isn’t kept at an individual bank branch. All of your money is stored digitally. Also, even if the bank was to go bankrupt (no pun intended), if it’s financially insured by the FDIC or NCUA, you’re covered for a maximum amount of $250,000.
4. You Have Easy Access to Your Money
Sure, you can probably get to your money faster if it’s shoved under your mattress. But with online banking and access to ATMs, you have access to your money from anywhere in the world. You can transfer money from one bank to another, something you can’t do with the money in a mattress.
By having your money in a savings account, you can take advantage of online banking, check your balance, and track your spending. However, you shouldn’t be doing any spending from your savings account due to the transfer limits. Instead, withdraw money in large amounts infrequently to not exceed to transfer limits.
Benefits of Saving Money for Students
5. Encourages Sensible Spending and Discipline
Having good saving habits, coupled with sound budgeting, can help college and high school students develop money discipline. By developing these money skills now, you can apply them to other areas of your life, such as investing.
Reinforcing spending and saving disciplines by practicing them over time helps your skills last a lifetime. Saving money can also teach you how to distinguish between wants and needs. Money is finite and your wants often exceed your spending power. Learning to save will encourage you to think of the trade-offs and other opportunity costs, helping you to spend money smarter.
6. Your Retirement Would be LIT
It’s always best to start saving for retirement as early as possible. By starting to save now, by the time you graduate and start working, you can have saved $16,000 to $30,000. If you continue to save and invest, you could have over 2 million dollars saved by the time you retire with the power of compounding.
Also, by starting to save for retirement early, you can probably retire early also. Most people don’t start saving for retirement until they are in their 30s. By starting now you have nearly a decade head start on your retirement savings.
7. You Can Relocate, If You Want
As a college student, you’re probably tired of the hassle that comes with having roommates. Or it’s not fun being woken up at 8 in the morning by your parents. By saving your money, you can have enough saved to get your own place sooner. Living by yourself may cost more, but by saving early you can use your savings to get by.
8. You Can Better Handle Emergencies
Stuff happens. Your car may break down or you might need to catch a flight at the last minute. The point is that life is full of unexpected occurrences. You need money set aside to be able to handle these emergencies and not have to worry about if you can afford it.
Reasons to Save Money as a Teenager
9. Fosters Self-Reliance and Independence
You can learn to be financially independent and self-reliant in your adult years by being a successful saver as a teen. Saving up for the things you want to buy helps you to be more responsible in general.
By learning to save money as a teen, you can develop a better financial understanding of delayed gratification. The ability to wait and reflect on your future purchase will help you reduce your spending to only the things that bring value to your life.
10. Learn to Set Long-Term Financial Goals
When you learn how to save money as a teen, you are also learning how to build wealth. You are also learning how to set goals your money can achieve for you in the future. As a teen, you can easily get tunnel vision on your present lifestyle. But it’s important for you to take charge of your own spending and saving goals.
You can do this by aiming and looking ahead three to six months. Looking ahead will show and help you understand wealth in the long-term.
Want to develop positive money traits like planning, setting goals, and delaying gratification? Sit down and map out your financial priorities over the next one to three years. Review and revise your priorities every six months and you will gain amazing financial clarity for achieving your goals.
11. Prepares You for Access to Credit Cards
Until you reach the age of 18, you don’t have to worry about getting approved and running up credit cards in your name. That will change once you turn 18, then credit card companies and payday loans will be waiting for you.
Now is the time to prepare yourself to be fiscally responsible and instill in you financial independence so you can make good decisions. The best way to do this is by developing money accountability through being a smart saver. By saving smartly, you’ll be able to rely on your own finances to buy the things you need and want instead of depending on credit cards or loans.
12. It Could Make College Life Easier and More Fun
It’s not possible for you to save for your entire college tuition. But you could definitely save up enough money to have cash and buy the things you need. For example, if you’re 15 years old and can start to put away $150 each month, then you could have over $5,000 when you start college.
That’s a lot of money to have available for a rainy day emergency fund, rent for off-campus, concert tickets, late-night study snacks, or whatever you want! It’s your money. Even if you don’t go to college, that money can still be used to help you get off on the right foot, whatever path in life you choose.
Why Saving Money Young is Important
13. Saving a Little Early is Better than Saving a Lot Later
The longer you wait to plan and save for your retirement, the more money you’ll need to invest each month later. Even saving as little as $100 every month while you’re young can make a big difference in your retirement savings.
For example, let’s say you, at 20 years old, opened up an Individual Retirement Account (IRA) and started saving just $100 each month. If you continued to save and invest your $100 until you were 50 years old, and you received an 8% annual rate of return, you would end up with $151,000. Not bad for only saving $100 a month.
Now let’s say your friend started 15 years after you at the age of 35. If they saved and invested $400 until they were 50 years old, and they received the same 8% annual rate of return, your friend would only end up with $139,680.
Because you started early, you were able to invest less each month but managed to grow your account $11,320 more than your friend who invested four-times more than what you were investing.
So, start saving a little now, so you won’t have to save a lot later.
14. Compound Interest is Your Friend
Compound interest is your best friend and works in your favor the younger you’re able to put it to work. If you save $1,000 and it grew by 3% each year for 40 years, your ending balance the first year would be $1,030. In year two, your investment would increase by $30.90. Not much, but it’s something.
If we fast forward to year 39, your $1,000 would grow to $3,218. At year 40, the balance would increase to $3,316, an increase of $98. Remember the first-year increase was $30.90. With the power of compounding, your annual return is over 200% greater than it was the first year.
That’s how the miracle of compounding earnings on earnings works by taking the first dollar saved to grow future dollars.
15. Mastering Savings is a Key Financial Skill
Being able to save your money is a fundamental financial skill that is key to managing your expenses and building future wealth. Saving is the basics. If you don’t know the basics of saving money, many other financial responsibilities will be difficult.
If you haven’t learned the discipline and planning that comes with saving money, then paying bills will be a challenge later. Not to mention being able to save for major purchases like a house, or a car. It all starts when you are young that building these lifelong financial skills are important.
Importance of Saving Money for the Future
16. Allows You to Take Calculated Risks
When you have savings in the bank, you can afford to take risks. It allows you to have freedom of choice. This choice could be to leave your job and start your own business. Or to leave your job and go back to school to gain the skills needed to start a new career.
Having availability to money gives you the confidence to pursue your passions. You might even get the opportunity to invest in a business or idea. Imagine being offered an opportunity like Mike Walsh or Oren Michels were in 2010. In 2010, these two individuals invested $5,000 into this crazy idea called Uber. Just 9 years later, their $5,000 investment grew to over $24.8 million.
17. You’re Able to Buy a Home
One of the major requirements for buying a home is having a down payment. Unless you’re using the VA loan, most lenders will require you to put something down. And seeing that most lenders won’t let you borrow the down payment, you need money in the bank before you come to the closing table.
So, if you are looking to buy a home now or in the future, make sure you start putting money away now for the down payment. In addition to the down payment, there are other costs you should also be saving for, such as administration fees, home appraisal, and inspections, just to name a few.
18. Buying a Car Would Be Easier
Having money saved can make buying a car easier and less expensive. For example, the golden rule for buying a car is to use the 20/4/10 rule. The rule states that you should put at least 20% down, finance the car for no more than 4 years, and ensure all expenses (car payment and insurance) does not exceed 10% of your income.
By not following this rule, you could finance a $15,000 car at 4.5% interest over 5 years and your monthly payment would be $279. The total interest you would pay at the end of the loan would be $1,778.
By following the golden car buying rule, you could put down 33% ($5,000) and borrow $10,000 at 4.5% interest financed over 3 years. This would result in a monthly payment of $297. Sure, you’ll pay $18 more each month, but the total interest paid would be $708, 60% less. Not to mention you’ll own the car 2 years sooner. All by having savings for the down payment.
19. Savings Helps You Stay Out of Debt
Saving money can help you get out of debt and keep you from getting deeper into debt.
Because of credit cards, one of the largest contributors to people’s debt. Credit cards are basically borrowed money. People borrow money when they don’t have enough of it, such as for emergencies or unexpected events.
The majority of people will experience at least one totally unexpected expense each year. When it happens, most people just use their credit card. Smart people, on the other hand, use their reserve funds in their savings account.
When unexpected events happen, pay for them using reserve funds instead of putting them onto your credit card. You should keep at least $1,000 in a reserve or emergency fund.
Why Saving Money for Retirement is Important
If you think Social Security will be sufficient to help in your retirement, think again. Based on current projections, people working today won’t have any Social Security benefits.
But even if Social Security benefits will be available, it won’t be enough.
A 30-year-old making $50,000 a year (and factoring in pay increases) can expect to make less than $22,000 a year (using today’s dollars) in Social Security benefits when they turn 67. The average living expenses for people 65 – 74 is $47,000. Even with Social Security, you still need to come up with about $25,000 of income to live comfortably when you retire.
The only way to generate enough income when you retire is to start saving for it. If your employer has a 401k, make sure you’re making contributions. Most employers match contributions up to a certain percentage.
If your employer doesn’t have a retirement plan option, you can open up an IRA and still achieve the benefits of a tax-deferred account. M1 Finance has the best platforms to invest your IRA and it’s free. And you’ll earn $10 when you sign up!
21. Fewer Employers Are Offering Pensions
Long gone are the days where you can work at a company for 40 years and retire with a pension. Only 14% of companies offer a workplace pension.
Even if your employer offers a pension, you might not stick around long enough to use it. Today, people switch jobs every 2 to 5 years. And to be honest, workplace pensions have been horribly mismanaged, leaving employees with nothing after decades of service.
I’m lucky enough to be in the military where I’ll receive 50% of my base pay if I retire at 20 years. If I stay for 30 years (which is the plan), I’ll get 75%. In today’s dollars, that equates to $83,000 in retirement each year, before taxes.
Unless you’re in the military, chances are you won’t have a pension. Even federal employees have a retirement plan similar to a 401k called the Thrift Savings Plan (TSP). The military has access to TSP also to supplement retirement.
So, if your employer is offering a 401k or similar retirement plan, use it. It’s probably one of your best chances to save for retirement.
22. You Can Avoid Having to Live With Your Children
If you have kids, chances are you won’t mind spending some time with them when you retire, but at your own discretion. Having to live with your kids because you can’t afford to support yourself isn’t the ideal situation. The last thing you want to do is become a burden in your final years.
Although your kids may not mind, you shouldn’t think of them as a retirement option. Therefore, unless you hit it big with the lottery or receive a large inheritance, you need to save enough money to cover your living expenses in retirement.
I would even sacrifice paying for your kid’s college in order to fund your retirement. Your kids can take out loans if they need to go fund their education and pay it off during their working years. There are no loan options to fund your retirement.
Disadvantages of Saving Money
1. Lower Returns Compared to Other Options
Sure, a savings account typically has a higher interest rate than a checking account, but that interest rate is pennies compared to what you can achieve with other accounts. The average savings account interest rate is 0.10%. So, if you have $5,000 in a savings account, in 5 years your money would grow to $5,025.
If you put that same $5,000 into a low-cost index fund, such as the Vanguard S&P 500 index ETF, you would have made an annualized return of 10.53% over that same period. And your $5,000 would have grown to $8,248.
For short-term goals where you’ll need the money in 1 to 2 years, a savings account is a good option. But if you don’t need to touch the money for another 3 to 5 years or longer, then growing your money with low-cost index funds is smart.
So, if you have money that you can’t afford to lose, a savings account is great. But if you have the time and desire to grow your money, a savings account is the worst place.
2. Inflation Erodes Your Savings
In 2005, the average movie ticket cost was $6.41. If you had $10, you could get a movie ticket and have money left over for a small popcorn and a drink. Today, a movie ticket will cost you $9.16. Your $10 won’t go very far at the movies today. That’s how inflation works by eroding the purchasing power of your money each year.
Recall the $5,000 in the last section, which grew to $5,025 in your savings account. Remember, the growth was achieved by having a 0.10% interest rate compounded over 5 years.
But if you factor in the 2.45% average annual inflation rate over the past 30 years, your $5,025 would end up only having the purchasing power of $4,432 after 5 years. If you left your money in your savings account for 20 years, your purchasing power would be $3,087. Ouch!
Inflation hurts savers. That’s why you should seek to actively grow your money if you have a long-term outlook. If not, it will sit and be eaten away by inflation.
3. There are withdrawal limits on savings accounts
Federal Regulation D mandates that electronic withdrawals from savings accounts be limited to 6 transfers per statement cycle. This rule applies to withdrawals made online and by phone.
If you exceed the 6 transfer limit, you could be hit with fees from your bank or credit union. Worst, your account could end up being closed. You don’t have the same restrictions in a brokerage account, where your money can grow faster.
Need an example?
Let’s say you have your $15,000 emergency fund invested with M1 Finance using low-cost index funds. And let’s say you had a $2,000 car emergency. Well, you could borrow the $2,000 at 3.5% while your $15,000 continued to grow.
You can pay the loan back over a year or more. During the same time, the growth of your $15,000 would have exceeded the cost to borrow the money, assuming an 8% annual return. It’s the perfect emergency fund hack that allows you to grow your emergency fund while having quick access to cash.
Frequently Asked Questions (FAQ)
How much should you have in savings?
Most people should have at least three to six months of living expenses in savings. For example, the average monthly living expenses for a married couple with children is $3,875. This amount includes monthly expenses for rent or mortgage, utilities, groceries, car payments, and other basic living expenses. Therefore, this person should have $11,625 to $23,250 in savings.
How much of your income should you save?
Using the 50/30/20 rule of thumb, you should save 20% of your income. Meanwhile, only 50% of your income should be devoted to necessities and no more than 30% should be spent on discretionary items (movies, eating out, etc). The 50/30/20 is a quick and easy way to prioritize your income and spending.
How much should you save a month?
Take the amount of savings you need and divide it by the number of months to your goal. Let’s say you want to build a 3 month $11,625 emergency fund. If your goal is to build your emergency fund over the next 2 years, divide $11,625 by 24, the number of months in 2 years. So, to reach your savings goal of $11,625 in 2 years, you should save $484 each month.
Final Thoughts on Why Saving Money is Important
I just gave you 22 reasons why saving money is important. Now, I’d like to hear from you.
Which of the 22 reasons convinced you to save more money? Or, is there a reason to save money you think should be included on this list?
If so, share this article and tag me on Twitter or Facebook and let me know.