We hear the message all the time—save money. Although that message is frequently given, there’s rarely a reason or a why given behind it. For some people, there may be obvious reasons to save money, but for others, not so obvious. A couple in their mid-30’s with a family of four has different reasons for saving than a 22-year old fresh out of college.
To clarify for this post, when I refer to saving, I’m not using it interchangeably with investing. They are two different things and each has their own unique benefits. For the record, I believe we need to do both, but that’s for another post. In this post, I will be referring specifically to saving.
Although we all have different and unique reasons for saving money, I think there are very common reasons everyone should save. These are the top 6 reasons to save money.
Number 1: The Inevitable That Comes Up
The first on the list of reasons to save money is the inevitable that comes up. There are no guarantees in life but something that is as close to a guarantee as you can get is that the unexpected will come up. The surprise plumbing issue (which I’m currently dealing with), a problem with the car, a trip to the emergency room—things like this happen all the time. We can either be prepared financially to deal with them, or get caught off guard.
When we’re prepared, we have the money available and are able to immediately pay for the unexpected issue. But when we’re not prepared, we’re caught on our heels. When we get caught on our heels, we have to scramble to pay for the unexpected expense.
For example, if someone has less than $1,000 in their emergency fund like I used to, they won’t be able to pay for an unexpected expense in the thousands. There are lots of things that cost in the thousands:
- A new transmission
- Major plumbing issue
- New roof or major roof repairs
- Most cars
- And much more
When we’ve got the money, these things are an inconvenience. We get them fixed, pay for them, and move on with our lives. When we don’t have the money, they become a crisis that we have to find a way to pay for or get into credit card debt. Very stressful.
Unexpected expenses are bound to show up. We never know when—that’s why we call them unexpected. They can come today, tomorrow, next week, or three years from now. When we’re financially prepared, we’re ready for these types of things no matter when they occur.
Number 2: Peace of Mind
This next reason piggybacks off the last section. Since we know unexpected expenses will come up, we might as well give ourselves the peace of mind that we can cover them. It’s a lot easier to sleep at night knowing that we have money to take care of whatever might come up the next day, month, or year.
This principle also applies to when the unexpected actually occurs. If someone takes their car to the mechanic and gets an estimate for a few thousand, that’s a lot easier to swallow for someone with a large emergency fund. They’re not going to be happy about it or throw a party, but they’re also not going to lose sleep over this estimate.
Conversely, someone without an emergency fund is probably going to have stress around this expense. It’s very uncomfortable not to be able to pay for things, and we have a way of carrying around this stress with us throughout the day.
It’s hard to quantify how much peace of mind an emergency fund actually gives us. Some people probably rate having a financial cushion very high. Others may not care as much. Most people are probably somewhere in the middle of the spectrum, and might shift their values as their life changes. For example, someone with two young children probably values having a financial cushion more than they did when they were in their early 20’s and had little responsibility.
Number 3: Avoid Having to Withdraw From Investments
A big reason to save money is simply so we don’t have to withdraw from our investments. No matter what investment(s) you choose, the best wealth building tool is to invest and allow compounding to occur. Pulling money from investments to pay for expenses hinders compounding. That means that not only are you paying for the current expense, but you’re also paying the opportunity cost, something I write a great deal about in my book Cash Uncomplicated.
If you have enough in savings, you can simply pay for the unexpected out of your savings without having to dip into investments. Let’s give an example to illustrate the point.
An Example
Jimmy has $14,000 in savings for the unexpected. He also has $39,000 invested in index funds. Jimmy’s car breaks down and the bill is $1,900. While inconvenient, Jimmy pays for the repair out of his savings and goes on with life. He now has $12,100 in his savings. He wants to build that back up to $14,000 but it’s not urgent.
Meanwhile, the stock market goes up 20 percent in the next year. Since Jimmy didn’t need to pull money from his investments, he is able to enjoy the benefits of a rising market and capture all the gains from the 20 percent increase. A year later he has more in investments than he did the year before and his money is continuing to compound.
On the other end of the spectrum, Michael has that same $39,000 in his investment account, but only a few hundred dollars in his savings. When he gets the same car bill that Jimmy did, he has to pull money from his investment account to pay for it. Which drops his investment account to a little over $37,000.
When the stock market goes up 20 percent over the next year, Michael is still benefiting because he has a little over $37,000 invested, but he’s not realizing the same gains as Jimmy is. Michael isn’t compounding at the same level because of this.
To give the numbers:
- A 20 percent increase in a $39,000 investment equals $7,800
- A 20 percent increase in a $37,000 investment equals $7,400
$400 may not seem like a lot of money, but when it happens repeatedly, it becomes a much bigger deal. Money in a savings account protects us from having to pull from our investments and miss out on the opportunity for additional compounding.
Number 4: Buy Something We Want
Once we become really good at saving and investing, it’s easy to get caught up in the future. “I’m investing heavily in my 20’s so I can retire early at 45” or “I’m investing half my income now so I can retire in 10 years” These examples are both very worthy goals, but they are also very future oriented.
It’s important to invest for the future, but it’s also important to live for the now. Saving money allows us to better live for the now. It’s one of the reasons I recommend everyone save for vacations and keep a “fun fund.” Those are both accounts where we save specifically to spend on items we want, or experiences.
If you want to go on a weekend trip, it’s nice to have the money sitting in savings ready for you to spend it. Or if you want to book a vacation for next summer, it’s a great feeling to have the money ready to go. That way you can book the trip guilt free and have it paid for well before you board the plane or get in the car.
If someone wants a new road bike or set of golf clubs, how great is it just to pull the money from a savings account and make the purchase without any buyer’s remorse or guilt?
Saving money to spend on ourselves and our families is a great way to live for the present. Yes, we continue to automate our investments so we can secure a great future. But we also need to ensure that we’re enjoying our lives in the present. We can do both, and saving to spend is a great way to ensure we are living for the present day as well as the future.
Number 5: Keeps Us Ahead of the Game
When we save, we’re ahead of the game. As mentioned earlier in this post, we know the inevitable in life comes up, we just don’t know when. Why not have the savings in advance for what we know is going to happen at some point?
Having savings is a way to gain control of what happens in life. It’s taking a proactive stance and being prepared. It’s a way to act on our environment by putting the proper channels in place. Conversely, not having savings puts us in a reactionary state. Something happens, we scatter to find a way to pay for it, or go into credit card debt. We’re reacting to our environment rather than exerting control over it.
I’m a big believer in controlling what we can control and being at peace with everything we can’t control. Of course we can’t control things like the weather and natural disasters. But we can control our savings account and how prepared we are for unanticipated events and situations.
Number 6: Increased Options
Last, but not least of the reasons to save money, having savings increases our options. Imagine a scenario in which your car requires a major repair. Your car is still relatively new and in good condition, but out of warranty. So you’re responsible for footing the bill.
- First mechanic estimate: $2,800
- Second mechanic estimate: $1,900
- Third mechanic estimate: $2,400
You didn’t like the first mechanic and he is charging the most so you quickly eliminate him. You like the second mechanic just okay, he’s mostly in the running because his estimate is the lowest. He briefly explained the work being done, but kind of rushed through the process. Online reviews for his shop are a little above average, but nothing stellar.
You really like the third mechanic. His estimate is reasonable, he explained all the work in detail to you, and offers a year warranty on all his work. He said he does work like this all the time and can complete the work in a couple days. He also has several hundred five star reviews online, with multiple reviewers describing him as honest and great to work with.
If you have plenty of savings in reserve, you would choose the third mechanic without a doubt. If you don’t have adequate savings, you’re probably going to go with the least expensive mechanic and hope for the best. It might work out with the inexpensive mechanic, but it doesn’t feel great.
Having increased options doesn’t just apply to cars repairs. This principle applies everywhere from work being done at your home, to medical procedures, to staying at a nicer hotel on vacation. Having more options just has a way of making life easier. It’s not money buying happiness, but it is money making life easier.
What are your top reasons to save money?
