Saving money takes discipline and often seems like a thankless task, especially when you’re just starting out on your financial journey. But saving money is the most important and fundamental habit you need to establish to make any meaningful financial progress in life. In this article, we will look at 7 reasons why you need to save your money. Some of the reasons are obvious, while others might be new to you.
Why Should You Save Money?
If you can manage to spend less than you make, every dollar you save is really a dollar “spent” buying your financial freedom. Even when just getting by seems like a struggle, most of us can still come up with a few dollars a day to put toward our savings goals. And whether you’re managing to save just a few dollars a day or a few hundred dollars a day, the goals and principles of saving are the same.
It can be very easy to lose sight of why we are saving in the first place, so here are 7 fundamental reasons we should all be doing our best to save those dollars:
1) Saving allows you to take risks and have lifestyle flexibility.
Whether you want to start a new business, go back to school to learn a new skill, or take time off of work to be with your kids, you need to have some financial flexibility in order to feel good about any of these big moves. You will feel ten times better about making big, risky changes in your life if you have built up a financial safety to catch you when times get tough.
2) Harness the power of compounding.
Money + time = a lot more money. The true power of compounding is hard to wrap your head around. A modest return on your investments over your investing lifetime results in what seems like an impossibly large amount of money.
All you need to do is play around with a compound interest calculator for a few minutes to see the amazing results. If this does not motivate you to save and invest, nothing will. Check out the moneychimp compound interest calculator to see what kind of money your savings can turn into over your lifetime of investing.
For example: your IRA contributions of $6,000 invested every year over a 40 year working life, with an 8% annual return, results in over $1.75 million. You actually only contributed $240,000 over your lifetime ($6,000 x 40years), but you end up with over $1.75 million due to your compounding returns! That’s the power of compounding, and that’s how you can build some serious wealth.
3) Not having any savings makes everything more expensive.
Having little or no cash on hand will cause you to end up spending much more on the things you buy.
The main cause of this problem is the interest you pay on your purchases. If you don’t have money in the bank, it will be impossible to plunk down a big down payment on a house or a car, and that large ballance that you’ve financed starts accrue interest that must be paid month after month. The same goes for your credit card bills; if an unexpected expense comes up (and it always does), it will be hard to pay the whole account balance if you don’t have any extra money on hand. Interest will start racking up on the unpaid balance, and you will end up paying far more than the original amount of money you put on the credit card.
Another, less obvious way, that lack of savings makes everything expensive is related to the types of products and services you select when you’re broke. When you have no extra money, you will naturally be inclined to choose the least expensive solution to your problems to avoid going into debt.
However, the cheapest solutions often end up being the most expensive in the long run because of increased ongoing costs. Suppose you need a new roof on your house, and you feel financially forced to hire the cheapest contractor you can find. Although the initial cost might be the lowest, you open yourself up to shoddy workmanship and cheap materials. You can expect problems, and will probably need to replace the roof all over again much sooner than if you had just spent the extra money to have it done right in the first place.
4) Reduce stress.
Stress is an absolute killer in terms of your physical and mental health, and we all want to avoid it as much as possible. The first step in reducing stress is identifying what is causing the stress in the first place. Sometimes it’s hard to clearly identify the fundamental problem causing our stress, but if you really analyze it and drill down on your issues, I think you will find that lots of your stressors have a financial basis.
Stresses relating to your personal property (house, car, etc.) are usually financial stresses. Even many of our relationship stresses are often fundamentally related to money; financial problems are the one of the leading causes of fights and divorces among married couples.
While saving might seem unpleasant to some of us, feeling constant financial stress is much worse. If you are stressing about how you are going to pay all of your monthly bills, or how you are going to afford that new furnace or roof that you need, it’s hard to feel secure and relaxed in your financial life. Savings gives a cushion so you don’t have to worry so much about unanticipated life events.
You would be amazed how your stress level will start to disappear once you have a nice cushion of savings. Life feels much more manageable with some money in the bank.
5) Keeps you out of the consumerist mindset.
We live in an intensely materialistic and consumption-driven society, which promotes financial irresponsibility on many levels. Being constantly immersed in, and surrounded by these types of values can make it extremely hard to see past the consumer mindset and grasp the value of saving money.
Once we are able snap out of the “see-want-buy-see-want-buy” consumer cycle, we are more able to identify the things that actually bring us happiness if life. Sticking to a savings plan goes a long way in helping to identify the parts of life that actually bring happiness.
When we force ourselves to resist the consumer mindset by following a savings plan, it doesn’t take long to realize that all of the “stuff” we acquire is not what brings happiness. Disciplined saving is a way to help our true sources of happiness emerge from the materialistic fog of our society.
6) Keeps you out of the debt cycle.
Consumer debt is a financial prison, and saving buys financial freedom. It’s that simple. It is almost impossible to make any kind of true financial progress as long as there is a big scary debt hanging out there in front of you in your financial life.
Saving money is the critical step in both eliminating and avoiding consumer debt. When you have a savings plan in place, the saved money can initially go to crushing your interest-accruing debt. Once the debt is eliminated, sticking to the savings plan will build up cash reserves that can be used as a way to pay for unanticipated expenses, so you don’t have to go back into debt.
7) Gives you the opportunity to be charitable.
Nothing brings satisfaction and happiness like being charitable and giving back. Giving time or money to a good cause can bring you lots of satisfaction, but it is hard to imagine giving if you are in debt and spending all the money you make.
Improving your financial situation by saving will not only improve your life, but it will give you the opportunity to help improve the lives of others as well.