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 to try saving? Because everyone has to start somewhere, and if you work at it, your financial situation is likely to improve over time. Saving money is worth the effort. It gives you peace of mind, it gives you options, and the more you save, the easier it becomes to accumulate additional savings.
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 billsif 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, as long as you’re living within your means. 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, if you have savings accounts for your children’s education and your own retirement that you’re regularly funding, you’ll sleep better at night. 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.
If you get sick and need expensive healthcare that your insurance doesn’t cover, you’ll have a way to pay for it even though you can’t work while you’re getting treatment. And knowing that you have options because of the money you’ve socked away can give you even more peace of mind.
No, money doesn’t solve every problem. Ifyou 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.
Money Working 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. Over time, you’ll need to work less and less as your money works more and more, and eventually, you might be able to stop working altogether.
What does it mean to have your money working for you? 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 1% interest annually and not even keep up with inflation, which tends to run around 1% to 2% per year. You’ll even have to pay taxes on your meager 1% earnings. Anything is better than earning 0%, though, or not having savings and going into credit card debt, which will cost you 10% to 30% in interest per year.
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.
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.
FAQs
Everyone knows you should save money— not only can your savings help you avoid depending on credit cards and other forms of debt in the event of unexpected expenses, but it can also help you reach your financial goals, like preparing for retirement or purchasing a car, a home, or an education.
Why is it important to start saving now? ›
The importance of saving money is simple: It allows you to enjoy greater security in your life. If you have cash set aside for emergencies, you have a fallback should something unexpected happen. And, if you have savings set aside for discretionary expenses, you may be able to take risks or try new things.
What is the best age to start saving money? ›
One key short-term goal to plan for is the need for an emergency fund. According to Bankrate, your emergency fund should equal three to six months of bills. CNN Money suggests that you start saving for long-term retirement goals in your 20s, as soon as you leave school.
Is 27 too late to start saving for retirement? ›
It is never too late to start saving money you will use in retirement. However, the older you get, the more constraints, like wanting to retire, or required minimum distributions (RMDs), will limit your options. The good news is, many people have much more time than they think.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How much would I need to save monthly to have $1 million when I retire? ›
Suppose you're starting from scratch and have no savings. You'd need to invest around $13,000 per month to save a million dollars in five years, assuming a 7% annual rate of return and 3% inflation rate. For a rate of return of 5%, you'd need to save around $14,700 per month.
What to do 10 years from retirement? ›
Here are some steps to consider when you are approximately 10 years away from retirement.
- Make sure you're diversified and investing for growth. ...
- Take full advantage of retirement accounts, especially catch-up contributions. ...
- Downsize your debt. ...
- Calculate your likely retirement income. ...
- Estimate your retirement expenses.
“By the time you hit 33 years old, you should have $100,000 saved somewhere,” he said, urging viewers that they can accomplish this goal. “Save 20 percent of your paycheck and let the market grow at 5% to 7% per year,” O'Leary said in the video.
How much money does the average 40-year-old have in the bank? ›
Average Savings By Age
| Age Range | Account Balance |
|---|
| Under age 35 | $11,250 |
| Ages 35-44 | $27,910 |
| Ages 45-54 | $48,200 |
| Ages 55-64 | $57,670 |
2 more rows“A common rule of thumb is to have at least 25 times your annual expenses saved. This is based on the 4% withdrawal rate, which is considered a safe rate to avoid depleting your retirement savings too quickly. For example, if your annual expenses are $50,000, you would need $1.25 million saved,” Kovar said.
The $1,000-a-month retirement rule says that you should save $240,000 for every $1,000 of monthly income you'll need in retirement. So, if you anticipate a $4,000 monthly budget when you retire, you should save $960,000 ($240,000 * 4).
How much is $100 a month for 40 years? ›
According to Ramsey's tweet, investing $100 per month for 40 years gives you an account value of $1,176,000. Ramsey's assumptions include a 12% annual rate of return, which some critics have labeled as optimistic given that the long-term average annual return of the S&P 500 index is closer to 10%.
Is $100 a month enough for retirement? ›
Consider two hypothetical investors. Investor A starts investing $100 a month at 25. By age 65, they would have a retirement balance greater than $640,000, assuming annual returns of 10%, which is the average return of the S&P 500 over the long term.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
How to budget $5000 a month? ›
Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.
How much money should I have left over at the end of the month? ›
The 20% rule is a good general guide, but it isn't the right fit for everyone. Some people can save above that rate, while others merely struggle to make ends meet. “Some people pay their rent and they have nothing left.
Why is saving important in our daily life? ›
The future is unpredictable, and financial emergencies can crop up anytime. Saving money allows you to create a safety net for your future expenses as well as unplanned financial needs. The more you save, the more peace of mind you have, as you are better prepared for anything life throws at you.
Why is saving time important? ›
One of the main reasons DST was created was to create a way to save energy and to get more use out of our natural daylight. Since March 1918, there have been many updates and changes to the idea and laws passed.
Why do we need saving? ›
People save money for a variety of reasons as it provides financial security and freedom and also secures you in case any financial emergency arises. One can avoid debt, pay off loans, live their dream life and avoid further debt if they have saved a sufficient amount (which differs from each individual to other).
Why is saving important to the economy? ›
Why is saving and investing important in an economy? Savings are used for investments. An increase in investments typically boosts an economy. Basically, increased savings can support increased investment levels and stimulate the economy.
