Why, When, and How to Save?

Learn why savings are important to financial wellbeing, different reasons why you would save, and how to start saving!  

The Importance of Saving  

Whether you are planning on going to college, paying off debt, getting ready for retirement, or the unexpected happens, saving money could be a lifesaver. Saving is such an important aspect of financial security and success that even financial experts recommend setting aside 20% of your take-home income for savings. 

Before creating your savings plan, it’s important to think through your personal short- and long-term plans and goals that you may want to save for. It’s also important to realize that not everyone may have the ability to save because of various factors such as debt, low income, or very high expenses. If this sounds like you, you may want to check out one of these card stacks instead: Budgeting 101:How to Plan For Financial Success or The Goods and Bads of Debt. 

Saving for the Unexpected  

Unexpected things can happen, whether it’s a medical emergency, getting laid off, a car accident, etc. These things can all take a huge toll on you financially if you don’t have money set aside for them. An ideal emergency fund usually holds between 3-6 months of living expenses, which can be grown over time by allocating some of your income every month to your savings. 

Even when you stock up your emergency fund, you should continue growing your savings. This will be helpful in planning for retirement, university, or even a fun vacation!  

Saving for Retirement 

Although we speak of this much more in the card stack Yes, You Should Invest for Retirement Now, compounding is the way small amounts of money grow over time, particularly when you invest in a retirement fund, the stock market, or bonds. One such investment plan is called an Individual Retirement Account (IRA) -- a 401(k) or a 403(b) -- which are usually offered by employers. These plans are also tax-advantaged, meaning they will reduce your current income taxes. Read more about the 401k here. 

Saving for Lifestyle Planning 

Besides retirement and emergencies, you may have short-term or long-term plans in your life that you may want to save up for.  

With undergraduate and graduate university tuition rising each year, savings can be crucial.  

While there isn’t much the average college student can do to save prior to college, setting aside money from the start of your career on a monthly basis will help you figure how you want to allocate towards your student loans, investing, homeownership, etc. 

If you plan to start a family, saving could help you contribute to your children’s life-expenses. For example, if you save $1000 a month, by the time your child is 18, you’ll be able to afford the average private college tuition. If invested, that money will also compound. Plus, with a safety net of savings and more, you can plan for a vacation or other big expenses. Read more about the most common college savings plan, the 529 Plan. 

How to Save More 

Creating a successful savings plan is simple. Look into your budget to see what excess cash is left after paying for your expenses. If this comprises 20% or more of your take-home income - great! Set that aside for savings. If you have less than 20% of your take-home income to save or want to save even more, think through your personal short- and long-term priorities and goals, as well as how to narrow down your non-essential spending.  

For starters, think about how you can save on a daily basis. Consider drinking your coffee at home instead of buying coffee on your way to work. A coffee will run most people around $5 per day, while you can brew around 30 cups of coffee at home for $15 total. Assuming you drink a cup of coffee every day, over a year, you would spend $1825 for the former and $182.50 for the later. That’s a 10x difference! This can be applied to making homemade lunch, buying some things secondhand, etc.  

On a monthly basis, consider getting cash-back credit cards, narrow your spending on redundant subscription services (do you really need 3 streaming services?), and sign up for free rewards or loyalty programs that provide discounts for grocery shopping, travel, and gas.  

Over the long term, start budgeting and planning ahead, enroll in your employer’s retirement plan, and optimize your shopping schedule to fall in discount seasons (i.e. buy holiday gifts on Black Friday).