Why Is Saving Money Important? 7 Reasons to Save Money in a Bank
Saving money sounds like a no-brainer, so why is it hard for so many people? Part of the problem is that many of us don’t understand the “Why” behind saving money. We don’t have a reason to save and can’t relate to vague terms like financial security or building wealth. We need to know how saving money will improve our lives.
Seven Great Reasons to Save Money
If you need a little motivation to save money, here are seven savings goals worth pursuing. Some are short-term, while others may take decades to reach.
1. Build an Emergency Fund
If you currently have no cash reserves, your first savings goal should be to build an emergency fund. Too many people lack the savings to cover a financial emergency, such as a car repair or a leaky roof, leaving them financially vulnerable. Often, they end up paying for the expense with a credit card or line of credit, putting themselves further into debt.
You can only break the cycle of debt once you can begin to pay for things with cash instead of credit. If you still need to build your emergency fund, start with a modest goal of $300 to $500. Once you hit your target, aim for $1000. While the correct amount will differ for everyone, I recommend saving three to six months of living expenses, understanding that reaching that goal may take a while.
2. Freedom in Your Career
Many people feel stuck in careers they don’t enjoy. But switching occupations can seem impossible unless you’ve built a savings nest egg. Saving enough money to cover your living expenses for an extended period means you have options if you no longer want to stay in your job. You may be able to ditch the 9-5 and start your own business or take time off to consider your options.
3. Save for a Down Payment
One of the biggest challenges facing young Canadians is figuring out how to enter the housing market. One thing is sure; you can only buy a home in Canada with a 5% down payment. Saving for a down payment is easy. Set up an automatic contribution into an RRSP (first-time homebuyers) or TFSA account. Figure out how much you’ll need for a down payment and your timeframe. That will help you decide how much you need to save each month.
First-time homebuyers can take advantage of the Home Buyer’s Plan, a government program that allows you to borrow money from your RRSP for the downpayment of your first home and repay the funds over 15 years. You get the tax benefits of RRSP deductions without paying taxes on the withdrawal.
4. Save For a Major Purchase (Car, Vacation)
If you’re planning a major purchase in the next year or two, your default shouldn’t be to borrow the money. For example, many people charge entire vacations to their credit card, with no plan as to how they will pay for it. If you’re planning a vacation in the next year, figure out the total cost, create a monthly savings plan, and start setting the money aside now. That way, you can enjoy a guilt-free vacation, knowing it’s fully paid for when you leave.
5. Save for Your Education
Canadian parents can save towards their children’s education by opening a Registered Education Savings Plan (RESP), a tax-sheltered investment plan with a 20% grant from the Canadian government. It’s never too late to start saving for your children’s education, but the sooner you can take advantage of the government grant, the better.
6. Save for Retirement
It’s never been more important to focus on retirement savings. With fewer companies offering pension plans, gone are the days when you could rely on an employer-sponsored retirement plan as a primary source of retirement income. Sure, there’s the Canada Pension Plan (CPP) and Old Age Security (OAS), but they don’t offer enough income to live on in retirement.
Opening an RRSP account is the obvious way to start saving for retirement. Your contributions will be tax deductible, and the money will grow tax-sheltered until you begin to withdraw at retirement. Nowadays, more Canadians are incorporating their Tax-Free Savings Accounts into their retirement savings strategy. TFSAs don’t offer tax deductibility, but you don’t pay tax on withdrawals, which is a huge benefit.
7. Financial Independence
Financial independence is a worthy savings goal, but what does it mean? The most common definition is reaching a point where you no longer have to work to cover your income needs. This could mean having enough money saved so that you can live off the passive income generated by your investments. Or, it could mean owning income-producing real estate properties that generate enough income to cover your monthly expenses.
Does this sound appealing to you? Financial independence has its own following, known as the FIRE movement – FIRE stands for Financial Independence Retire Early. Many FIRE devotees save large percentages of their monthly income to achieve a work-optional lifestyle in a short period, sometimes within ten years.
I think of financial independence as a journey rather than a destination. The truth is, you can gain a measure of financial independence while continuing to work by having a well-funded emergency fund, enough money to pay for major purchases, and being on track to meet your retirement savings goals.
How to Start Saving Money
Once you know your “why,” you must figure out how to save money. It’s a big topic but start by opening a basic savings account. Consider opening a high-interest savings account from an online bank for your emergency fund and automating your contributions. You can do the same with an RRSP, TFSA, or RESP. It’s also a good idea to familiarize yourself with important savings concepts, including compound interest and the Rule of 72, which is an easy way to calculate the doubling period of money.
Final Thoughts on Saving Money
As you can see, there are many benefits to saving money. You can avoid debt, have peace of mind, cover unexpected expenses, help out family members, avoid big payments on a new car loan, retire at an early age, spend more time with loved ones, the list goes on and on. My advice? Pick a savings goal from the list, and start saving today.