What is the importance of saving money?

More and more people think that saving is overrated: inflation “eats away” at it, and quality of life suffers because of the need to save. However, the importance of saving is always high, regardless of your income level, plans, and expectations for the future. 

This article collects and arranges the main reasons to save money. And they are not so obvious: you can face any of them without even realising it will happen. So, if you don’t already save money, here are 10 compelling reasons to start doing it now – with an explanation why it is essential.

What is saving and how is it different from investing?

Saving money involves setting aside a certain amount from your regular income, primarily as a way of funding future expenses, investments, or in case of an emergency. Saving is typically considered a low-risk activity as the money usually sits in an account with a well-reputed financial institution or, in some rare cases, in a safe deposit box.

Saving money should be considered an essential building block of your financial independence. The origins of this activity go back to ancient times when primitive cultures hunted and gathered food for the winter season. In our modern era, we no longer stack up fur or animal remains. Instead, we save money – in most cases, digitally – by using financial institutions and vehicles created for that particular purpose.

Why is saving money important? Depending on the type of arrangement selected, these savings may generate a regular stream of income from the interest payments received in exchange for storing the money with a financial institution.

The main difference between saving and investing are the risks and returns associated with these activities. The financial products available for saving money are considered low-risk instruments but they are also among the least profitable among all asset classes.

Meanwhile, investing is a far riskier activity. In exchange for this extra risk assumed, investors are typically compensated with far more attractive returns compared to savers.

Why do people save money?

There are many reasons for saving money and why you should save money will depend on your financial, family, and personal goals primarily.

This is a non-exclusive list of the top reasons why people decide to set money aside:

Setting up an emergency fund: this money can be used to deal with unexpected disbursements such as medical expenditures or car repairs.

Funding a vacation: taking a trip is often an extraordinary expense that may surpass the amount a person can set aside in a single month. Therefore, people often save money for months until they have enough to pay for everything from flight tickets to accommodation.

Starting a business: new businesses require capital to operate and grow. Most entrepreneurs rely on their life savings to invest in their projects.

Retiring: saving money for a later age is a great way to make sure that you can enjoy those days with your family and have enough for any medical expenses that may come your way.

Making a down payment on a home: buying a first home is a priority for most married couples and the first step to achieve that goal is to set aside money for the 10% down payment that most financial institutions require.

Paying for their kids’ education: most parents want to give their kids the best opportunities for their careers. This can be achieved by saving money from the get–go.

Peace of mind: money may not be the sole source of happiness but having some savings at hand for rainy days does not hurt and may help you and your loved ones sleep better at night.

Saving money is the traditional path to generating wealth for you and future generations. You can consider your savings as the cornerstone of a big building that will progressively get taller as you add more and more money and earn interest on those funds.