I’m sure you’ve heard a ton of financial gurus telling you that you need to save money. Although it sounds like the adult thing to do, what are the real reasons to save money?
After all, why should you save your hard-earned money instead of spending it on things that you’d enjoy?
Well, I’ve narrowed it down to two things.
The two main reasons to save money are to, first, avoid financial risk. Secondly, to prepare for a future expense. No matter what you’re saving for, it will be for either of these two reasons.
So what is financial risk? Having financial risk means that you don’t have enough money to cover your financial obligations or to weather a loss in income. Saving money allows you to reduce these risks by having a monetary cushion.
While you can save money to avoid risks, you can also put money aside to prepare for future expenses. This is a wise thing to do to avoid getting into debt or, frankly, not having the money when you need it.
Either way, being prepared and secure are important reasons to save money.
But what specific things, or reasons, you should be saving for. What risks should you be mitigating or expenses should you be stashing for?
That could be an endless list, but I’ve got 15 important things that you can focus on instead.
Top 15 Reasons to Save Money This Year
1. Reduce financial stress
In addition to reducing your financial risk, saving money also helps to reduce your financial stress.
Imagine having an emergency that you’re unable to pay for. You’d probably be stressed out.
Now imagine having money available to cover those emergency expenses. You may find the situation inconvenient, but it’d certainly be less stressful.
This is what saving money can do for you. It can help alleviate some of the financial stress caused by not having money to pay for important things in life. Knowing that you have a lot less financial risk will make your relationship with money way less stressful.
2. Gain financial freedom & independence
Have you heard of the term financial independence? Better yet, do you know what it means to be financially free?
To be financially independent simply means that you have the financial ability to cover your living expenses without having to actively work. Likewise, financial freedom means that you can live life without the worry and stress of money.
Saving your money allows you to experience both of these things. If you’re strategic about putting money in your retirement savings account and other investment accounts, you can allow your money to work for you.
The money that you earn from these accounts can be used to cover living expenses. You can learn more about investing in this article.
I’d also venture to say that you should also pay off debt so that you truly have financial freedom.
3. Tax advantages
If not for the reasons that I’ll expound on below, one reason to save is to take advantage of tax breaks. There are several savings vehicles that you can leverage to lower your overall tax burden and keep more money in your pockets.
By no means am I advocating avoiding taxes; however, I am advising you to take advantage of opportunities to lower how much you pay in taxes.
A great book to read about this is Lower Your Taxes. It explores way more than just savings accounts that you can use. Nonetheless, saving in retirement accounts, health savings accounts, and even education accounts can help you lower your taxable income.
4. To cover emergencies
Emergencies happen and they can be costly. That’s why it’s important to have money saved to cover unexpected expenses. The way to do this is by having an emergency fund.
The general rule of thumb when it comes to emergency savings is at least 3 months’ worth of expenses in a savings account. The purpose is for the funds to be available in the event of an emergency.
Things that would qualify as an emergency include a job loss, medical expense, or car repair.
Ideally, this money would be in an account that is separate from your bank accounts used for day-to-day spending. This prevents you from misusing your emergency funds on other, non-emergency, items.
5. To cover retirement expenses
The truth is that you can’t work all of your life. This means that you’ll need money saved to cover your living expenses during your retirement years.
That’s where saving for retirement is important. You have to put money aside now so that you’ll have money in your future.
The most common way to save money for retirement is by leveraging a retirement savings, or investment, account. You can get one that’s sponsored by your employer–typically a 401k account or similar. Or you can set up an individual retirement account (IRA) on your own.
The money that you deposit into your retirement account will grow over time. During your retirement years, you’ll be able to withdraw from these earnings to cover your living expenses.
The sooner you start saving, the longer time you’ll have for your money to grow.
6. To pay for education
Over the last decade, higher education costs have increased by over 25% with no signs of slowing down. According to USNews, the average cost of a private college education was over $41,000 in 2020. In-state students paid nearly $12,000 for public colleges and universities, while out-of-state tuition was about $27,000.
This is just for tuition…
With the added cost of living expenses, organizational dues, and other fees, these numbers continue to climb.
With that being said, having money saved for education expenses is a must if you want to avoid the ever-growing trap of student loan debt. Or, it could at least reduce the debt load.
The great news is that there are tax incentivized programs that allow you to save for college and other educational expenses. You can take advantage of an education savings account (ESA) or 529 plan.
As a parent, you can start saving for your child as soon as they are born, which gives you more time to save for their future.
7. To start a business
Another great reason to save money this year is to fund your business ideas.
Though there are tons of business ideas that you can start for free, the truth is that you’ll eventually need to make an investment if you want your business to grow.
Some things that you should consider saving for include:
- Legal fees (incorporation, trademarking, etc.)
- Software (accounting/bookkeeping, etc.)
- Education (courses, coaching, etc.)
- Outsourcing (virtual assistant, etc.)
Each year, I put money aside to invest in each of these things to help my online business grow. In fact, you can grab my list of products and services that I use in my business.
Starting a business is one way that you can leverage your money to make more money. So be sure to put some money aside to invest in your business.
8. To buy a home
Buying a home is a big expense. It not only requires saving for the down payment but other expenses as well. Consider closing costs, repairs, inspection fees, moving costs, and more!
It’s super important to make sure you have money saved to cover these expenses related to buying a home.
One way to do this is by setting up a sinking fund. This is a type of savings account specifically meant to help you save for your financial goals. In this case, you create one to save up for your home purchase.
Each pay period, you would simply transfer money into the account until you reach your savings goal. I recommend automating this transfer so that you don’t even have to worry about it.
9. Save to take advantage of investment opportunities
There’s nothing worse than missing out on a good opportunity.
The lack of money can often stand in the way of taking advantage of great opportunities. You can avoid this by saving.
One reason to always have money saved is to take advantage of investment opportunities. Perhaps it could be a business venture or an investment property that went on the market. Either way, you’ll need to have funds available to take advantage of these opportunities.
10. To purchase a vehicle cash
Did you know that a vehicle depreciates by upwards of 30% within the first year? By the time you’ve made your final payment on a new car, your car isn’t worth nearly as much as you actually paid for it. So even if you wanted to sell it, it’d be at a loss.
Knowing this, why obligate yourself to monthly payments of a car that won’t hold its value?
If you don’t want to take the brunt of that loss, it’s best to purchase a used vehicle…in cash. Used because you don’t absorb the 30% depreciation. The previous owner will have already done that. Cash because it gives you negotiating power.
If you want to pay for a car in cash, you’ll need to start saving. This, again, is where a sinking fund will come in handy.
11. To travel and vacation
I’m an avid believer in experiencing all the good that life has to offer. This includes traveling and unique experiences.
But, in order to do this, you need money. Of course, there are plenty of ways that you can save money on travel; however, you still need to save up.
Some travel expenses that you’ll need to consider saving for include:
- Hotel or rental stay
Putting aside a small portion of your paycheck into a travel account will make traveling become way more attainable. If you’re constantly saving up, you don’t have to wait for large windfalls of money or get into debt to afford a trip.
12. To cover medical expenses
Even with health insurance, medical expenses can be costly. With copays and deductibles, it’s easy to rack up debt trying to cover medical costs.
Although you may be insured, it’s still a good idea to put some money aside for medical expenses. The hope is that you don’t have to use it, but it’ll be there just in case.
One way that you can save for medical costs and get a tax advantage is by leveraging a health savings account (HSA). These accounts are available to those who have high deductible plans and the money can roll over each year.
The other interesting incentive of HSAs is that you can also invest your funds. Once you’ve reached a certain threshold in the account, you can invest your funds and allow your money to work for you.
13. To give to others in need
One of the great benefits of having money saved is being able to use it for good–like helping those in need.
I’m a firm believer that when you give, you’ll receive. It’s the law of reciprocity.
That’s not to say that you should give your whole life savings away. It does mean that you should put a bit aside just to have the ability to give to others who are less fortunate or in need.
14. To quit your job
Have you ever had the feeling of being trapped in a job that you hated? I have and, trust me, it sucks.
The unfortunate reality for many people is that they can’t afford to take the risk of leaving. Mostly because they don’t have money saved to cover the cost of being jobless.
There are many names for “quit your job” funds, but it’s simply having money put aside to cover your expenses. It’s not different than an emergency fund.
So if you’re unsure about your career or if working a traditional job is a fit for you, then consider saving up funds to be able to put in your 2-weeks notice.
15. To have peace of mind
Lastly, saving money gives you peace of mind. Knowing that you have money saved for emergencies, retirement, and doing other fun things in life can put you at peace. It’s financial freedom but in the emotional and mental form.
Nothing beats not worrying about your money. Having money saved allows you to live with that peace of mind.
Where to save your money
Where you put your money is just as important as saving it. After all, you want to maximize your money and let it work for you. One way that you can do that is by choosing the right place for it to grow.
Depending on what your goal is for saving money, you’ll want to leverage different types of accounts. I talk about this more in-depth in my article on savings accounts.
In general, though, you should leverage high-yield savings accounts and also investment accounts for money that you’re putting aside.
Benefits & importance of saving money
As you can see, saving money helps you mitigate financial risks and prepare for your future. By saving, you can avoid getting into debt or being unable to cover your financial obligations.
Remember that saving money can help you reduce stress caused by finances. It also gives you the ability to afford things and live a life that you enjoy. Ultimately, it is the pathway to financial independence and freedom.