Most people know that they should save part of their income, but they may not realize all the benefits that come with it. Saving is an important habit for a number of reasons — it helps you cover future expenses, manage financial stress, plan vacations, and more.
Understanding the different ways saving money can help you succeed could motivate you to save more. So here are six key ways you can save money.
1. Have a safety net in difficult times
One of the most important savings goals everyone should have is building an emergency fund. The purpose of an emergency fund is to ensure that you can afford various expenses caused by sudden and unexpected life events, including medical expenses, unemployment, home repairs, and family emergencies.
It can also give you peace of mind that you would not have to fight to cover living expenses in such an emergency. Many Americans — especially those on lower incomes — struggle to accumulate emergency savings, but it’s important to try to save the expenses for at least a few months to avoid building up large debts in the future.
2. Achieve life goals
Let’s face it – many of our life goals are not free. Everything from college to buying a home requires some funding that you need to plan ahead of time.
“If you have future goals – a big vacation, raising a child, upgrading your home or vehicle – it can be important to start saving now so you have the funds available when you’re ready to meet those goals to achieve,” said David Edmisten, the founder of Next Phase Financial Planning, a Prescott, Arizona-based firm.
The sooner you start saving for your goals, the more likely and quicker you’ll be able to achieve them. It’s important to list your various goals and develop savings strategies for both short-term goals (like vacationing or paying down a house) and long-term goals (like starting a business or retiring).
3. Labor flexibility
By saving your money, you can secure a cushion in the event of a gap in employment or a change of job.
“A big benefit of saving is the flexibility it offers,” says Alex Crouch, founder of Nashville-based Tech Financial Planning. “When you have a nice nest egg, it opens up a world of opportunity.”
“Maybe you have your eye on a job that would be great for your career development, but you would have to take a pay cut,” says Crouch. “Maybe you want to start your own business and need a runway to get it up and running. Maybe you’re burned out and need a sabbatical.”
The money you save not only gives you the support to take time off for mental and physical health, but also gives you the opportunity to achieve broader career goals. These savings may enable you to move into a career field that better suits your goals, or they may be used to fund starting your own business.
4. Reduced Tax Liability
When you save money in a retirement plan, you get different tax benefits depending on the plan. For example, with a traditional 401(k), you can reduce your taxable income by making savings contributions to the tax-deductible plan.
“Saving pre-tax dollars for a retirement plan is a great way to legally reduce your tax liability,” said Melissa Ellis, founder of Sapphire Wealth Planning in Kansas City. “If your employer offers a 401(k) plan, you can make a tax-deferred contribution of up to $20,500 into the 401(k) plan in 2022. If you are 50 or older, you can contribute an additional $6,500 to the plan.”
A Roth 401(k), on the other hand, doesn’t allow for tax-advantaged contributions, but it also carries a unique tax advantage: you don’t have to pay taxes when the funds are eventually distributed. That means the money in a Roth 401(k) grows tax-free.
Although a Roth IRA has lower contribution limits, those who do not have the employer-funded 401(k) plan can still receive tax benefits. Roth IRA contributions also grow tax-free, and you don’t have to pay tax on the funds if they’re withdrawn or passed on to heirs.
5. More travel options
Being able to travel is one of life’s great rewards. It can provide a chance to relax, explore the world, and expose yourself to exciting new experiences.
While travel can be expensive, that doesn’t mean you should write it off. Instead, think of travel as an opportunity that opens up for you when you set a savings plan.
By setting aside a predetermined amount each month for a vacation fund, you can avoid dealing with long-term credit card debt, says Kiersten Peshek, senior wealth advisor at San Francisco-based Citrine Capital. “Since you have the cash ready, you can pay for the trip with your credit card, get the points/miles/etc. and then pay off the credit card charge in full with the cash saved over the year.”
6. Helping others
When you’ve reached a point in saving where you’re comfortable with your various savings and your wealth has grown, you can become involved in causes that go beyond individual goals. That could mean helping a friend or family member in need, or making a donation to a charity close to your heart.
You may want to keep your savings in a high-yield savings account where they can grow over time. As your savings grow, you can contribute more to causes that matter and find fulfillment by helping others in their own financial journey.
Saving money is important both to lay a foundation for financial stability and to explore opportunities beyond meeting necessity. It gives you more flexibility in your career, more opportunities to travel and the opportunity to support causes close to your heart.
You may want to create separate funds for different savings goals, including an emergency fund, so it’s easier to keep track of how much you’re saving for each. Compare different savings accounts to find the best plan and features, and let your savings grow.