Why Saving is ImportantLife is expensive. Every day we are spending money whether it be on a coffee in the morning, or splurging for a day with your friends. It’s certainly easy to spend money, not as easy to save it. A general rule of thumb that is good to live by is to always put aside 20% of your income. In fact, when you receive a paycheck before spending a single cent, put a portion of it away in a savings account. People save money for many reasons, but here are some of the bigger ones to consider:
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- Emergency Fund – You never know what is around the corner, you may need to pay for car repair, or be laid off from work for a period of time. That is why it is important to save just in case something happens down the road. You always want to be prepared. It is important to realize that this money you put aside is not meant for making money over time, rather it is to be there simply when you need it. When starting out, an emergency fund of $1,000 to $2,000 is a safe bet, but as you begin to work full time with a yearly salary, aim to be saving at least 6 months’ worth of expenses. Learning how to budget early will greatly help you cut down on unnecessary costs when you are faced with an emergency and don’t want to be spending lots of money. It is also important to choose the right type of account to set up an emergency fund in. Types of savings accounts can be explained here.
- Retirement: If you’re finishing high school, saving for retirement probably isn’t one of your top priorities, but this is something you’ll be saving for in the future. Most employers will offer a retirement plan, also known as a 401(k). I’ll provide links for you to do further research on your own should you wish to explore retirement further. If you are using this website and starting out on a job, I recommend using the links to read further. When you just start out with your career, thinking about retirement early is important. Don’t just think of it as saving money, but more of an investment in your future. Retirement is odd in the sense that you both save for it, and invest in it.
- Down payment on a house: Once again, if you’re at the high school age, or even just graduating from college, this may not be your top priority. As such I won’t be putting much emphasis on it. A house is an investment you might consider down the road and it’s important to save for it. The larger your down payment, the greater your negotiating power and the lower your interest rates. How much you put towards a house depends on your living circumstances. I will provide links should you wish to do further research.
- Vacation and Luxury Goods: Everyone wants the latest phone right? Well, I hope you’ve got the money put away for it. This is the easiest form of saving because you have something to look forward to. This is by far the easiest form of saving, but to do it effectively you need to be able to budget your money. Some ways to do that are explained here. This budgeting includes saving for larger purchases such as a car!
- Education: This is a heavy hitter, especially with the rising cost of college tuition and crippling student loan debt. You can learn more about the cost of loans and types of loans here . The more money you are able to save now, means you’ll have to worry about it less in the future. There are also many other options to consider rather than borrowing the money for college which you can learn about here.
Saving is important, and knowing which accounts to use and how to set up a savings account, can save you a great deal of grief later on in life.
Investing VS. SavingSome people get the two of these confused and it’s important to know the difference. When you’ve attained a job and some financial stability, investing is something you’ll want to start doing. As I am sure you are aware by this point, saving suggests placing your money in a safe and secure place such as those listed in the “Types of Savings Accounts” section. Money in a savings account is generally used for short-term goals. These include an upcoming vacation or an emergency which needs a quick response. If you’re looking to make a lot of money, savings accounts aren’t your best bet. You’ll accumulate some interest, but not a whole lot. The main force that wrecks the money in a savings account is inflation. Savings accounts are unable to stay ahead of inflation, meaning over time your money can lose its spending value. Hence why it is better to use it for short term goals.
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This problem with inflation is where investing comes in. When you invest in something, you believe that asset you invest in will generate some form of return over time. The most common form of investing is retirement. When investing, your main goal is for the money to grow, but there are no guarantees hence why it is better suited for long term assets. As already mentioned, retirement is a common one, many people may also invest in a house.
When it comes to inflation and investing, the goal is to outpace inflation so that your return after inflation is solid and real.
Still confused? Check out the videos below which explain investing and inflation.
When it comes to inflation and investing, the goal is to outpace inflation so that your return after inflation is solid and real.
Still confused? Check out the videos below which explain investing and inflation.
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