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.
Are Europeans big savers?
According to data [1] from the European Commission, Europeans saved 15% of their income during the first quarter of 2022. In 2020, in the middle of the pandemic, that rate increased to a 7-year high of 25% as both individuals and families were able to save more money than usual during lockdowns.
Meanwhile, by the end of 2021, households in countries where the euro is used saved over 1.3 trillion euros as per data [2] from the International Monetary Fund (IMF).
A recent survey [3] from the European Commission called the Eurobarometer revealed that 53% of the respondents had a savings account while 22% had a pension or retirement product – also considered a mechanism to save money for later in life.
Luxembourg (92%), Belgium (89%), Sweden (87%), and The Netherlands (85%) stood out as the countries with the highest percentage of respondents claiming that they had a savings account.
Interestingly, this same survey showed that individuals within the region are becoming increasingly aware of the impact that their savings have on the environment. In this regard, the Eurobarometer found that 62% of the respondents agreed that their investments and savings should not be used to “fund economic activities that have a negative impact on the planet”.
How Do People Typically Save Money?
The financial industry has created different products through which you can save money and progressively grow your savings through something called “compound interest”.
Compound interest occurs when the interest payments you receive are immediately reinvested. As time passes, even though the interest rate may stay the same, the interest payment increases as the balance of the account has progressively grown.
You can grow your savings account via a combination of compounded interest and periodical contributions made from your regular income.
Most common financial instruments used to save money
Now, let’s dig deeper into the most common products used by individuals and households to save money. We will also explain why you should save money by using these products.
#1 – Savings account
A savings account is a product offered by a financial institution that is appropriately registered with local authorities. These accounts typically generate interest payments for the saver. The amount you will receive from these accounts will vary depending on the applicable interest rate for depositors.
Banks usually credit interest payments at the end of every month. In addition, most countries have established institutions that protect depositors by insuring their savings accounts.
Within the European Union, the Deposit Guarantee Scheme (DGS) [4] was established to provide coverage for up to €100,000 for all savings accounts offered by member banks within the economic bloc.
Why save money by using a savings account? The main benefit of using this product is that it is considered a low-risk instrument. That said, savings accounts typically offer the lowest return among all available financial assets due to this low risk.
#2 – Certificates of deposit (CDs)
A certificate of deposit (CD) is a product offered by financial institutions that locks in your money for a certain period and automatically reinvests the interest payments into the account.
Once the CD matures, you are entitled to receive both the principal and the accumulated interest payments you have earned during the lock-in period.
Why is it good to save money by using a certificate of deposit? A CD typically offers a higher interest rate compared to a savings account. They are also considered low-risk savings instruments and they enjoy the same coverage in terms of depositor insurance as traditional savings accounts.
That said, CDs typically lock in your money for a certain period. This makes them an unsuitable instrument in case you need to access your cash immediately at some point to cover your living expenses or other similar purposes.
10 Reasons Why Saving Money Is Important
Saving can give you freedom
Setting money aside and generating some extra income periodically can contribute to adding some usually much-needed peace of mind. It also enables you to pursue your goals, help others, and enjoy life at a whole new level. Experiencing this kind of freedom is one of the top reasons why saving money is important.
Experts suggest that both individuals and households should find a way to set aside from 10% to 17% of their monthly net income. How that money will be used will depend on your priorities and goals at the time.
The exact percentage may vary depending on your age. For example, adults between 25 and 35 years old should save at least 17% of their income as they will take full advantage of what is usually their most productive age. Meanwhile, older people may save a bit less as their expenses will probably rise as their family grows.
Saving provides financial security
You can save money to establish an emergency fund to deal with unexpected situations that can dramatically affect your financial well-being. These situations may include a sudden illness or being laid off from your job.
Professionals within the personal finance space recommend that households should set aside from 3 to 6 months of regular salary or monthly expenditures to deal with these unforeseen circumstances. This provides you and your family with a sense of security that helps everyone sleep better at night.
Saving means that you can take calculated risks
Saving money is typically considered a low-risk activity. Most of the institutions that offer access to products like savings accounts are covered by insurance policies that protect depositors from losing their money in case the bank goes out of business.
Even though a savings account is not the right vehicle if your goal is to generate life-changing wealth, it does serve as an instrument to grow your money conservatively to possibly explore other riskier but also more rewarding investment alternatives.
In addition, if you have a well-funded savings account you may feel freer to search and engage in new career opportunities, start a business, or just take some time off.
You can plan your short-term goals
Saving money and earning interest via a savings account or other similar product creates a predictable path for your financial situation. You can easily draft projections of how much money you will have a year or two from now if you keep adding a certain amount to the account periodically along with the interest payments that you will receive.
This facilitates the process of establishing short-term goals. For example, if you are planning to take a trip, you can estimate how much money you will be taking off the account at that time and how much will be left. Moreover, you can determine how much time it will take to reach a certain amount if you keep adding money to the account at the current pace.
To fund your long-term goals (previously:It provides for your children’s education)
Saving money is a great way to finance you or your family’s long-term goals such as starting a business or giving the down payment on a house.
Meanwhile, most parents want to make sure that they can provide for their children’s future. This emphasises the importance of saving money as a way to ensure that their future needs are covered.
As you can see, the money you save can be turned into a pillar to build new growth opportunities and achieve every goal you have in life.
Saving gives your family security in case of an unfortunate event
You cannot predict what will happen to your job or the world economy a month or a year from now. The only thing you can do is prepare yourself for whatever comes your way to the extent of your possibilities.
Setting aside money does not assure that you will not experience some kind of hardship if, for example, another pandemic occurs but it does give you access to services and solutions to the problems that may come up that would be otherwise inaccessible if you didn’t have these funds at your disposal.
You can minimise financial risk
Financial risks come from exposing your assets to vehicles whose value can experience large swings in relatively short periods. This is why we have established the difference between saving and investing.
Saving money gives you a high level of predictability and dependability in terms of the return you may earn over time. In addition, the risk of losing money is quite low compared to other alternatives in the financial world.
Saving gives you a better future on the retirement
Mathematically speaking, saving money periodically and putting it into a vehicle that generates interest can turn a seemingly small amount into the kind of money that can help you retire comfortably.
In Europe, the average deposit interest rate [5] for households stood at 0.71% per year as of September 2022. Rates have turned positive recently and that gives you the opportunity to once again use your savings account to generate some extra income.
Saving helps navigate tricky situations, meet financial obligations
When you have some money saved, you will have a larger number of choices to navigate the tricky situations that life may present you such as an unexpected illness or losing your job.
If any of those scenarios come your way, you should be able to cover your living expenses for a while – depending on how much you have set aside – while staying current on your debt.
This reduces stress and helps you focus on the next steps to take to get back on the horse. You will be tackling life’s challenges from a more comfortable position.
Saving builds wealth
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.
That money can be used to fund initiatives that can generate higher returns over time such as starting a business, pursuing a more fruitful career, or investing in the stock market.
Summary
So, why is it important to save money? Evidently, for many reasons. We have outlined 10 of them but there are many more. Your financial freedom, peace of mind, and the well-being of your family are just some of the most relevant ones to consider.
If you feel this is the time to start saving, make a commitment, use your online banking tools to make automatic deposits to your account every month, and enjoy the benefits of having something to fall back on when life gets tricky.
Frequently Asked Questions
What is savings?
Saving means setting aside a certain amount of money on an account or any other financial instrument. You can deposit money periodically to that account to increase its balance and most products pay an interest that further adds up to the overall amount.
What is the average deposit rate in Europe?
The average deposit rate within the European Union according to data from the European Central Bank (ECB) stood at 0.71% as of September 2022.
What is the difference between saving and investing?
Saving is typically considered a low-risk/low-return activity. In most cases, a savings account is offered by a well-established and appropriately regulated financial institution. The money within these accounts is also usually insured by local authorities to protect depositors in case their bank goes out of business. Meanwhile, investing is a riskier activity that can generate higher returns but does not enjoy the level of dependability and predictability that saving does.
Why should I save money?
In this article, we have shared the following 10 reasons to save money:
- It gives you freedom,
- Provides financial security,
- It allows you to take calculated risks,
- You can achieve your short-term and long-term goals,
- Your family has something to fall back on in case of an unfortunate event,
- Helps build a retirement fund and produce wealth,
- Minimises financial risk,
- It helps you navigate difficult life seasons and stay current with your debt.
List of References
- Source: ec.europa.eu
- Source: imf.org
- Source: europa.eu
- Source: finance.ec.europa.eu
- Source: ecb.europa.eu
