One of the most important aspects of personal finance is saving. Saving is, at the simplest level, putting aside money now for use in the future. But why is this so important? Why shouldn’t I just spend all of my money now and enjoy it? No one can know what the future holds, so there is a risk to saving. What if you’re not around later to enjoy the deferred fruits of your labor? I like to look at it the other way around: because no one knows what the future holds, what can I do today to protect myself tomorrow? For me, that is why saving is important. Saving gives you freedom and security. Saving allows me to take risks and weather setbacks. Saving gives me peace of mind.
Saving is an investment in your future self
Some people think of saving as a sacrifice. If I save this money now, I’m not able to spend it on dinner out, a new outfit, a vacation, etc. If I save this money now, I am reducing my current pleasure and enjoyment. This is all true. As the old saying goes, you can’t have your cake and eat it too (or, in this case, you can’t save your money and spend it too). So, when it comes to saving, you need to make a decision. Do you want to derive a benefit from your money now or later?
I would almost always argue for later. Yes, you need to meet you basic needs today. Yes, you deserve to go beyond your basic needs and meet some of your wants too. But that is where it should end. You do not need to meet every one of your wildest dreams today. Do you know why? Because, chances are, tomorrow you will want something different, and you will wind up in a vicious cycle where you try to make yourself happy through accumulation of material goods or even experiences. This probably won’t make you happy. It probably will push you into debt.
Saving = Freedom
First and foremost, money gives you freedom. If you live hand to mouth, relying on your full paycheck just to make ends meet, you’re never going to get ahead. You’ll be tethered to your job, whether you like it or not. When you rely on your paycheck, your options quickly dwindle. What if you hate your job and want to take time off to find a new one? What if the opportunity of a lifetime comes through but it doesn’t pay well? What if you’d like to start your own business but you know it won’t be profitable for a few months or years? In all of these scenarios there are three basic options: 1) stay where you are because you feel you have no other way to maintain your lifestyle; 2) go into debt to fund the change; or 3) use your savings to pursue your dreams.
I probably don’t even have to say that option 3 is my preferred choice. Scenarios like these are exactly the reason why you should save in the first place. Of course it is important to save for retirement, but it is naive to think that you won’t have anything come up between the ages of 22 and 65 that requires money. With savings, you are able to change your routine and weather a few months or years of underemployment or unprofitability in order to realize your dreams. You are free to make choices that align with your values instead of being stuck because you’ve built a life that requires a hefty paycheck to support.
I’ve had a few personal experiences where my savings have allowed me to comfortably make decisions that are good for me but bad for my income. The best example is an upcoming trip to France for 8 weeks. I was able to negotiate a 2 month, unpaid leave of absence with my employer in order to take advantage of an opportunity to travel and live abroad. I am able to handle an unpaid leave because I have savings that I can use to support myself during this time. And this is exactly the kind of thing I have been saving for (although I would never have predicted this exact scenario). I have no guilt about this trip and no concern about my finances. I am confident that my savings will see me through and that this trip will be worth all the forgone income and diminished savings. Thanks to rigorous saving over the past few years, I am able to take this trip and spend my money in a way that directly aligns with my values.
Saving = Security
Life happens, and sometimes not in a good way. Instead of an unexpected opportunity to spend the summer in France, I might have had an unexpected medical emergency, or car trouble, or a layoff. There might be a reason why I no longer have income through no choice (or even fault) of my own. This brings me to the second reason why saving is important: saving gives you security.
A cycle of debt and resulting poverty is an easy one to get into if you don’t have savings. Let’s say you have a medical emergency and a resulting $5,000 hospital bill. You’re also unable to work for a few weeks as you recover, leaving you without income. If you have savings, no problem. You can continue to pay your expenses, use your savings to pay off your medical bill, and head back to work when you’re well again.
But if you don’t have savings, this setback could mean the beginning of a vicious cycle. You don’t have income, so you don’t pay your rent. You get evicted and are forced to move into a short-term rental that is more costly. You can’t pay your medical bill in cash and instead put it on a credit card, so it racks up interest and balloons to $6,000 or $7,000. You make the minimum payments on your card but you’re using so much of your available credit that your credit score is negatively impacted. When you get back to work and are able to find a new apartment, you pay a higher rate because you’re seen as a credit risk. Now it is even harder to dig yourself out, as your expenses have gone up but your income hasn’t.
This is a nasty little scenario, and I’m not saying that this will happen to you if you don’t have savings. Many people have access to what I’ll call “buffer money” in one form or another, be it a short term loan from family or a pay advance from work. But you can see how, without savings, a difficult time becomes even more challenging, adding financial stress to an already unpleasant situation. Savings gives you security and peace of mind that you can make it through such unforeseen setbacks with minimal collateral damage.
The moral of the story
Life happens, in both good and bad ways. Since we cannot know how life will go, it helps to have savings so that we can weather setbacks and take advantage of opportunities. Saving isn’t a way to deprive your current self; it is a way to help your future self in whatever way you might need.
Why do you save money?