I’m sure you already know that saving money is important. Why exactly, though? In this article, I’ll go over the importance of saving money beyond simply having some extra cash on hand. I’ll review the steps I’ve personally taken to save thousands of dollars to meet my goals, including paying off over $20,000 in student loans, saving over $10,000 for travels around Asia and Europe, and eventually moving abroad to Vietnam (where I am still currently living!).
Read on to learn about the importance of saving money.
*Disclaimer*: the opinions expressed in the The Importance of Saving Money article and on the Frugal Fun Finance website are for general informational purposes only and are not intended to provide specific investment advice or recommendations on any financial or investing products. Any financial advice should be provided by a licensed professional.
Why You Should Start Saving Early
We should we save money early? There are tons of reasons. Let’s get into the details.
Saving Means Choosing Where The Extra Cash Will Go
When you save a portion of your paycheck, you have three main options with what to do with it. You can either 1. Pay off debt, 2. Keep it in cash savings in a checking account, or 3. Save or invest the cash.
Option #1: Paying Off Debt
If you have any debt, consider paying it off first, especially if it’s credit card debt. If you have student loan or mortgage debt, you may want to pay off a lump sum to bring the total amount owed down. It all depends on your other goals. How much do you need to save for other dreams you have that require money? Be sure to speak with a financial advisor before you make any decisions about debt repayment. Together, you can come up with a course of action surrounding:
- If you should pay off more debt right now and;
- If so, how much you should pay off.
Option #2: Keeping It In Cash
After sorting your debt situation, ensuring you have an emergency fund is paramount. When you keep the money in cash, you’ll either keep it in your checking account or withdraw it and have physical bills in your hand. Having some cash savings is a good idea. You’ll need some cash to cover 1-2 months of expenses in your checking account and another separate stash of cash for emergencies which can either be kept in your checking account or a separate ‘Emergency’ savings account. Why should creating an emergency fund be a top priority? It’s simple, really. Life happens. If you suddenly lose you job or have an emergency, you’ll need some cash to cover your immediate expenses.
The main reasons why you should save money for an emergency are:
- To cover your finances if you suddenly lose your job
- If someone in your family suddenly has a medical emergency
- If you need to pay for another unexpected expense such as a home repair
There are other reasons, but the three above are generally the most popular situations people need to unexpectedly finance. Generally, it’s best to have a stash of 3-6 months’ worth of expenses on hand to keep you afloat while you look for another job. If you’re self-employed or are in a single-income household, your risk is a lot higher if you lose your income. Therefore, it’s best you have close to 6 months’ living expenses in your checking account.
Option #3: Saving or Investing the Funds
After you’ve stocked your checking account with a float for monthly expenses and an emergency fund, you can think about stashing away some cash for your future. According to Investopedia, if you’re looking to use your savings within the next 5 years, you should save it rather than invest. This is because you’ll need your investments to recover from any stock market volatility before you withdraw the cash.
For example, let’s say that you decide to invest an initial amount of $5000 that you will need in 2 years for a vacation. However, there’s suddenly a drop in stock market. Your investment value has plummeted to $3000 a month before you need the cash. You now have no choice but to withdraw the money. On the other hand, if you keep the funds in a savings account that yields 3% simple interest and compounds monthly, over the course of 5 years, you’ll have just over $5800.
On the other hand, if you’ll need the cash in 5 years or longer, it’s generally best to put your money to work by investing it. When you invest your money, you’ll be able to take advantage of compound interest. Compound interest essentially means that you’ll make interest on interest.
The Importance of Saving Money and Taking Risks
The importance of saving money also extends to your risk tolerance. Whether we like to admit it or not, more money means more freedom. When you have several months of cash on hand, you’ll be able to take personal and business risks. Let’s say that you’ve been working a standard nine-to-five marketing job for several years. While you like your job, you have a strong desire to start your own business. The prospect of being able to work when you want, lead other employees and have more creative control is pushing you to go out on your own.
When you have, say, $20,000 instead of $2,000, you’ll be a lot less risk averse. You’ll likely be more willing to invest in the tools and human capital necessary to start up and sustain a business.
The Importance of Saving Money Extends Beyond Financial Habits
The importance of saving money isn’t limited to your finances. When you creative positive financial habits such as properly stocking an emergency savings account, savings accounts and investments, you’ll be motivated to create and maintain positive habits in other areas of your life! Here are a few examples of how creating and maintaining positive financial habits have helped me:
Staying Consistent with Meal Planning
Another benefit of saving money and getting disciplined with my finances for me was that I became an organizational geek, specifically with meal planning! Before I had a proper strategy for saving and investing my money, my grocery shopping and meal planning routine was a bit scattered. Instead of going to the grocery store once a week to maximize frugality, I would go multiple times a week, tempting me to spend more money on stuff I didn’t need. Additionally, I didn’t meal plan. Once I got on track with my finances, I was inspired to get on a budget while enjoying delicious meals. I did this by meal planning, creating a grocery list, comparing prices, shopping once a week, choosing a designated day to meal prep and batch cooking larger portions. Read all about it in the Frugal Fun Finance article on frugal grocery shopping and meals.
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Keeping and Maintaining a Decluttered Apartment
A solid savings strategy also inspired me to keep a clutter-free lifestyle. Getting organized has done wonders for my mental health. Before I moved abroad, I did a huge declutter of my apartment and gave away anything that didn’t bring me joy or serve a purpose. Even now, I take some time once a week to declutter papers, garbage and random stuff I accumulate.
You can do the same by decluttering every room in your house. Start with the bedroom, then move on to the kitchen, bathroom and other rooms in your home. Even if you aren’t a terribly messy person or a hoarder, cleaning your apartment or home is another way to save money. When you know where your stuff is, you won’t buy a duplicate item out of urgency or forgetting where the original item when.
Choosing Cheaper Alternatives
Understanding the importance of saving money and applying positive financial habits will help you appreciate what you already have. When I focused on intentionally setting aside a portion of my paycheck for an emergency fund, my vacation savings and my retirement account, I had to cut out some luxuries. Instead of going out for dinner twice a week, I cooked a homemade version of my favorite Thai dish once a week. Rather than going out for a $15 cocktail, I invested in the ingredients to make an Old Fashioned at home.
Appreciating the Simpler Things in Life
In addition to cutting down on my spending, I intentionally focused on free, everyday moments of joy. Every week, we rush around with little thought about the simple, ordinary miracles of life. The smell of fresh vegetables and spices filling the air as your create your favorite dish, the enjoyment of smelling freshly-baked cookings and the feeling of sunlight on your face are all experiences that cost little to no money. Each week, try focusing on one simple pleasure. Before you know it, you’ll be focused on what you already have instead of what you want to buy.
Tips on Saving Money
Now that I’ve covered the importance of saving money and all the positive impacts, let’s go over some practical ways you can save money without feeling burdened.
Create Savings Accounts for Separate Goals
As I mentioned earlier, it’s a good idea to keep separate savings accounts for specific goals. For example, if you have a vacation coming up next year and also want to adopt a dog, keep two separate savings accounts for each of these goals. This way, you’ll be able to visually see how much money you’ve saved and how much you have left to go for each goal.
Set Up Automatic Deposits
Creating and maintaining goals is work. You’ll need to dedicate a couple hours per week to review your goals and progress. Cross one ‘thing’ off your to-do list by setting up automatic deposits. For example, if you get paid on the 15th and 30th each month, set up an automatic deposit on the 16th and 31st of each month for a certain amount of money to automatically transfer to your savings or investment accounts. This way, you won’t forget and will be more easily able to keep on track with goals.
Decide on a Destination for Extra Income
Ah, that sweet year-end or Christmas bonus or birthday money you got by surprise. If you work at a corporate job, you may receive a year-end payment as reward for completing your obligations, so long as the company makes budget. If so, you’ll need to have a plan for where the extra cash you’re about to receive will go. Without a plan, it’s easy to let that cash slip away on a series of small purchases – or a couple large ones.
While there’s nothing wrong with treating yourself, consider if that cash could be used to help future you. Consider taking half and paying off part of your student loan balance. When I was in my first corporate job, I was in over $20,000 in student debt. I used my end-of-year bonuses to pay off my loan balances which helped me reduce my debt to $0 in less than 4 years and saved me nearly $3,000 in interest payments!
After you’ve paid off a portion of your debt (if applicable), take another 30-40% and put it towards a savings or investment goal such as a retirement account or an education fund for your child.
Finally, take the remaining 10-20% and use it to treat yourself. Remember, just because you’re being frugal and smart with money doesn’t mean you need to completely deprive yourself. Order that new accent chair or painting you’ve been eying for months or use the money for a special dinner out. Whatever treat you choose is up to you. Everyone has different things they enjoy. Choose an indulgence (or two) that you love!
Have an Accountability Partner
In addition to practical tips, having an accountability partner is another key way to stick with your savings goals. An accountability partner is a person you can trust to ask you about your progress and encourage you to stay on track. This person can be anyone you know and trust, such as a family member or friend with whom you’re comfortable talking about money with. Talk to your accountability partner about:
- How you’re feeling so far with this new challenge
- Any challenges you’ve faced in saving for your various goals
- How close you are to saving for a specific goal such as funding your emergency account
Keep it fun and light by meeting for coffee or lunch somewhere once a week after work or on the weekend.
A Final Word on the Importance of Saving Money
The importance of saving money cannot be understated. From being able to pay off debt, feeling secure in having cash stashed for emergencies and freeing up some funds for short-term pleasures, saving a portion of your income is crucial to your long-term financial success and peace of mind. Start small by saving 10% of your income, then slowly increase your savings goal. Be sure to consult a financial advisor for assistance. Practice a positive mindset by reviewing different phrases to motivate you in your journey saving money. Most of all, enjoy the feeling of seeing the numbers increase on your bank balance statement!
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Janita is a frugal living expert and owner of Frugal Fun Finance. With over five years of personal experience finding and trying out the best ways to make and save more money, she's eager to share her knowledge. Janita's strategies have helped her save thousands of dollars for funding investments and traveling to over 20 countries.
Janita completed training in personal finance at The University of Western Ontario and McGill University, two prestigious Canadian universities. Her expertise has been shared on GoBankingRates, Yahoo Finance, and NASDAQ.com.
