Saving Money Is Important Essay For 10

If you don’t earn much and you can barely pay your bills, the idea of saving money might seem laughable. When you only have $5 left at the end of the month, why even bother to try saving? Because everyone has to start somewhere, and if you work at it, your financial situation is likely to improve over time. Saving money is worth the effort. It gives you peace of mind, it gives you options, and the more you save, the easier it becomes to accumulate additional savings.

Peace of Mind

Who hasn’t lain awake at 3:00 a.m. wondering how they were going to afford something they needed? If money is really tight, you might be wondering how you’re going to pay the rent next week. If you’re a little further up the financial ladder, you might be worried about how many months you could pay the bills for if you lost your job. Later in life, the money thoughts that keep you up at night might center around paying for your kids to go to college or having enough money to retire. (Get help with college savings by reading Stop Procrastinating! Enroll In A College Savings Plan.)

As you accumulate savings, your financial worries should diminish, as long as you’re living within your means and not always looking for new things to worry about. If you already have next month’s rent taken care of by the first week of the current month, if you know you can get by without work for three to six months, if you have savings accounts for your children’s education and your own retirement that you’re regularly funding, you’ll sleep better at night. The reduced stress from having money in the bank frees up your energy for more enjoyable thoughts and activities. (Learn more in Banking: Savings Accounts 101 and Find The Best Savings Account Rates.)

Expanded Options

The more money you have saved, the more you control your own destiny. If your job has you on the verge of a nervous breakdown, you can quit even if you don’t have a new job lined up yet and take time off to restore your sanity before you look for new employment. If you’re tired of living in an unsafe neighborhood, you can move to a safer area because you’ll have enough for a deposit on a better apartment or a down payment on a nicer home. (Is buying a home in your future plans? Read How To Buy Your First Home: A Step-By-Step Tutorial.)

If you get sick and need expensive healthcare that your insurance doesn’t cover, you’ll have a way to pay for it even though you can’t work while you’re getting treatment. And knowing that you have options because of the money you’ve socked away can give you even more peace of mind.

No, money doesn’t solve every problem. It you are laid off, it might take as long as two years to find a new job. Some illnesses won’t go away no matter how many procedures you can afford, and random crime can happen even in a supposedly secure gated community. But with more money in the bank to deal with issues like these, you give yourself better odds of coming out on top.

Money Working for You

Most of us put in hundreds of hours of work each year to earn most of our money. But when you have savings and stash your funds in the right places, your money starts to work for you. Over time, you’ll need to work less and less as your money works more and more, and eventually, you might be able to stop working altogether.

What does it mean to have your money working for you? When you’re first starting to save, you’ll want to put your money somewhere safe, where you can access it right away for unforeseen expenses. That means an online savings account, where you might earn 1% interest annually and not even keep up with inflation, which tends to run around 2% to 3% per year. You’ll even have to pay taxes on your meager 1% earnings. Anything is better than earning 0%, though, or not having savings and going into credit card debt, which will cost you 10% to 30% in interest per year. (For related reading, see Why You Absolutely Need An Emergency Fund and How To Use Your Roth IRA As An Emergency Fund.)

Once you’ve saved three to six months’ worth of expenses in your emergency fund, you can start saving money in a tax-advantaged retirement account. That’s where the magic starts to happen. These accounts, such as a Roth IRA or 401(k), allow you to invest in the stock market. If you do it right, you’ll earn about 8% per year on average over the long run. You won’t pay any taxes on those investment gains along the way, which will help your money grow even faster. With a Roth IRA, you contribute after-tax dollars, and everything that’s in the account after that is yours to keep. With a 401(k), you get to contribute before-tax dollars, giving you more money to invest up front; you’ll pay taxes when you withdraw the money in retirement. (If you’re not sure whether it’s better to pay taxes now or later, you can hedge your bets and contribute to both your employer-sponsored retirement plan and a Roth IRA.) The third choice, a traditional IRA, allows you to contribute before-tax dollars as you do with a 401(k).

If you have a high income and low expenses, you might accumulate enough to retire in 10 years. For most people, it takes closer to 40 years. But at some point, if you save and invest regularly, you should be able to live off the income generated by your investments – the saved money that’s working for you. The earlier you start, the more time a small amount of money has to grow large through the miracle of compounding. (Feel like you don’t make enough to save anything meaningful? Read Why Small Retirement Savings Count.)

The Bottom Line

Saving money is incredibly important. It gives you peace of mind, expands your options for decisions that have a major effect on your quality of life and eventually gives you the option to retire. Most people who are wealthy got there through a combination of their own hard work and smart savings and investment decisions. You can become one of those people, too. (Ready to start saving? Read our Budgeting Basics tutorial.)

The Importance of Saving Money

We save, basically, because we can't predict the future. Saving money can help you become financially secure and provide a safety net in case of an emergency.

Here are a few reasons why we save:

  • Emergency cushion - This could be any number of things: a new roof for your house, out-of-pocket medical expenses, or sudden loss of income. You will need money set aside for these emergencies to avoid going into debt to pay for your necessities.
  • Retirement – If you intend to retire someday, you will probably need savings and/or investments to take the place of the income you'll no longer get from your job.
  • Average Life Expectancy – With more advances in medicine and public health, people are now living longer and needing more money to get by.
  • Volatility of Social Security – Social Security was never intended to be the primary source of income and should be treated as a supplement to income.
  • Education - The costs for private and public education are rising every year and it's getting tougher to meet these demands.

Without money put away in savings and/or investments, you open yourself up to other risks as well. For example, not having enough money to pay for emergency dental care may force you into taking a loan that your savings might otherwise have covered.

How much can you potentially save?

It’s important that you develop a budget using your net income as it reflects your take home pay after taxes and dedications. A common mistake people make is developing a budget off of their gross income. It’s a mistake because you're budgeting money you never possessed. Remember your potential savings is the difference between your net income and your expenses.

When developing a saving plan ask yourself these questions:

  • Are there any variable expenses that you can reduce or eliminate?
  • Is there anything you spend money on that you could eliminate and apply towards saving?

Tips for saving money:

  • Save windfall income – Any unexpected money such as income tax return money.
  • Collect loose change and deposit it in the bank – Use a piggy bank and deposit its contents when its full.
  • Try frugality – Purchase cheaper off brand items and save money.
  • Break a habit – Try doing one less thing you expensive venture a week and apply that money to your savings.
  • Save lunch money – According to a study by Forbes Magazine, Americans on average spend $1000 annually on going out to lunch. Bring your lunch to work and invest that $1000 in yourself.
  • Have a “buy nothing week”.
  • Compare costs of major items before purchasing anything – Do your due diligence, shop around before making major purchases.
  • Use coupons – Coupons are a great way to reduce living expenses.

Sources: InCharge Debt Solutions and the Federal Trade Commission

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