Saving money isn’t a luxury. It’s something that everyone must do once they can afford to pay the rent and feed themselves and their family. There are five reasons for putting aside money from each paycheck, and keeping it safe.
- Save for a Rainy Day
The most important reason to save is to ensure that you have a safety net. Outgoings are guaranteed. You’re always going to have expenses. You’ll always have to eat and find shelter.
The same though isn’t true of income.
Your employer could suffer cutbacks. Your clients could end their relationships. You can lose your job at any moment. And you have to assume that you will.
Unless you have a guaranteed income from some other independent source, you have to live with the assumption that at any time, your income could stop. And it might not start again for a long time.
According to figures from the Bureau of Labor Statistics, the median duration of unemployment between January and May 2021 ranged between 15.3 and 19.8 weeks. Less than a quarter of people who were looking for work in April 2021 had been unemployed for less than five weeks. More than 55 percent had been unemployed for at least 15 weeks, and 43 percent for at least 27 weeks.
That’s half a year without an income. Or to put it another way, almost half of unemployed people in America in 2021 had been without work for at least a week longer than the maximum unemployment compensation program.
There’s no question that Covid-19 made it harder than usual for people to find new jobs in 2021, but how long could you last without an income? Are you confident you could find a job before your benefits run out?
Save money each month, and you’ll have the cushion you need to see you through a sudden loss of income. You won’t need to beg friends or family for help, and you won’t need to take the first job that comes along to be sure that you can pay the rent.
- Meet Unexpected Expenses
In 2018, a paper from the Federal Reserve reported that 40 percent of American adults would not be able to cover an unexpected expense of just $400. Either they’d have to borrow the money or they’d have to sell something. Or they wouldn’t be able to cover the cost at all.
That means that almost half the adult population of the US are just one fender-bender, veterinary bill, or broken boiler away from a serious financial problem. And those are things that happen every day.
What makes unexpected expenses unexpected isn’t that they happen. It’s when they happen.
If you’re driving an old car, something will eventually go wrong. If you have a pet, it will be sick and old one day. Homeowners know that washing machines eventually break down. Computers become slower with age. Mobile phones get lost or stolen.
You can’t know when those sudden expenses will hit you. But you can expect that they’ll hit you one day. You need to be ready when they do. You need to have enough set aside so that unexpected costs don’t knock you down. They might be painful and annoying but they’re a part of life.
- Buy a Home
Buying your own home isn’t right for everyone. Renting property can increase mobility: it’s much easier to take a higher-paid job on the other side of the country if you don’t have to sell your home first.
Renting can shift many of the responsibilities for the building onto the property-owner: leaky roofs and termite nests might be your problem but someone else has to implement the solution. And owning a home isn’t always a great investment. Homes have expenses, and property prices don’t always rise. The money that you put in the walls might do better somewhere else.
But there are plenty of advantages to owning your own home too. Instead of paying rent to someone else, most of your mortgage payments stay with you. You’re not at the mercy of a landlord who doesn’t have your interests at heart. And above all, the property is yours. It’s your home.
Before you can put a foot on the property ladder though, you have to save. The minimum you can get away with is about 3.5 percent, but more realistically you can expect to have to save at least 5 percent of the price of the property, and usually much more.
And you should pay more. The bigger the deposit you pay, the less interest you’ll have to give to the bank.
If you’re planning to own your own home, you will need to save—both to buy a better home, and to buy that home for less money.
- Plan Your Retirement
The money you save will see you through bad times and ensure that you make it through emergencies. You’ll also need to save to buy those big items that require large down payments. But at some point, you’re doing to want to stop earning money and focus entirely on enjoying yourself. You’ll want to retire.
Putting money aside for your retirement must be an essential part of your saving plan. It might not feel like a part of a saving plan. You’re not saving money that you’re going to be able to use any time soon. In fact, most retirement plans will impose both taxes and penalties if you crack open the account early. But you are choosing not to spend money today in order to be able to spend it one day in the future—when you need it more.
The good news is that saving for retirement is easier than other forms of saving. There’s no shortage of plans, from 401(k)s through annuities to IRAs, that make saving automatic and even tax deferred. The key is to make sure that you’re signed up to at least one plan and that you’re making the most of the opportunity that saving for retirement offers. Sometimes, you can even increase your salary by agreeing to save more for the future. If your employer offers matching contributions, you should take all of the contributions on offer. Anything less is leaving money on the table—and in the hands of your employer.
- Make Your Money Work
The difference between those with wealth and everyone else is that while everyone else works for money, the wealthy let their money work for them. They put money aside every month, invest it, and let compound interest do its thing.
Let’s say you started with $100 from your first job. Each month, you save another $100 and you put it in an investment plan that pays 5 percent a year. After 20 years, you’ll have saved $24,000. But the effect of compound interest means that you’ll actually have $41,374 in your account. You’ll have saved $100 every month and that money will have earned $870 every year. After 20 years you’ll be more than $17,000 better off.
Making that compound interest isn’t as easy as it used to be. Interest rates are low at the moment. A savings account at the bank won’t pay more than 0.05 percent a year. That’s lower than the rate of inflation so there’s little sense in putting the money there, other than to keep it safe. But there are other options from bonds and shares to real estate and retirement funds.
They each have their advantages and disadvantages, and they each come with their own set of risks. You’ll have to weigh up those risks as you come to make your decisions. But what they’ll all do is make sure that your money works for you so that you can work less for money.