Most people know they should be saving a portion of their income, but they might not grasp all of the benefits of doing so. Saving is an important habit to get into for a number of reasons — it helps you cover future expenses, manage financial stress and plan for vacations, just to name a few.
Understanding the different merits of saving might motivate you to save more. So, here are seven significant ways saving money can help you thrive.
1. Having a safety net during hardships
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 costs, sudden unemployment, natural disasters, home repairs and family emergencies.
It can also give you peace of mind to know that if such an emergency were to arise, you wouldn’t have to struggle to cover the costs of living.
According to Bankrate’s emergency fund report, 47 percent of Americans surveyed said they wouldn’t be able to afford a $1,000 expense with their savings. Saving at least a few months’ worth of expenses can help you avoid building up greater debt in the future.
2. Meeting life goals
Let’s face it, many of our life goals aren’t free. Anything from pursuing higher education to buying a home requires a certain amount of funding, which you’ll need to plan ahead for.
“If you have future goals — a big vacation, a child’s education, upgrading your home or vehicle — it can be important to begin saving now so you have the funds available when you are ready to achieve those goals,” says David Edmisten, the founder of Next Phase Financial Planning, a firm based in Prescott, Arizona.
The sooner you start saving for your goals, the more likely you’ll achieve them faster. It’s important to list your various goals and develop savings strategies for both short-term goals (such as a vacation or down payment on a house) and long-term goals (such as opening a business or retirement).
3. Work flexibility
Saving your money allows you to have a cushion of support during gaps in employment or a switch in jobs.
“A huge benefit to saving is the flexibility it provides,” says Alex Crouch, founder of Tech Financial Planning based in Nashville. “If you have a nice nest egg it opens up a world of possibilities.”
“Maybe there’s a job you’re eyeing that would be great for your career growth, but you’d have to take a pay cut,” Crouch says. “Maybe you want to start your own business and need a runway to get it off the ground. Maybe you’re burnt out and need to take a sabbatical,” he says.
Not only does money you’ve saved gives you the support to take time off for mental and physical health, it also gives you leverage in realizing broader career goals. Those savings might allow you to move into a career field that aligns more closely with your goals, or they might be used to fund starting your own business.
4. Reduced tax liability
When you save money in a retirement plan, you get different tax advantages, depending on the plan. With a traditional 401(k), for example, you can reduce your taxable income by making savings contributions to the tax-deductible plan.
In 2023, you can contribute up to $22,500 tax-deferred to a 401(k) plan, if your employer offers it. For those 50 years or older, the limit is $30,000.
A Roth 401(k), on the other hand, doesn’t allow tax-deferred contributions, but it also comes with a unique tax benefit: 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 comes with lower contribution limits, those who don’t have the employer-sponsored 401(k) plan can still get tax benefits. Roth IRA contributions also grow tax-free, and you won’t have to pay taxes on the funds when they’re withdrawn or passed down to heirs.
5. More travel opportunities
Getting to travel is one of the great rewards of life. It can offer a chance to decompress, explore the world and expose yourself to exciting new experiences.
While traveling can be expensive, that doesn’t mean you should write it off. Instead, consider travel to be an opportunity that’s opened up to you by committing to a savings plan — especially if you start saving early.
If you set aside a predetermined amount each month for a vacation fund, you can avoid having to deal with long-term credit card debt, says Kiersten Peshek, CFP, lead wealth advisor at Citrine Capital based in San Francisco. “Since you have the cash ready, you can pay for the trip with the credit card, receive the points/miles/etc. and then pay off the credit card charge in full with the cash you saved throughout the year.”
6. Relieve financial stress
Financial uncertainty and unexpected expenses can take a significant toll on your mental wellbeing. Bankrate’s financial wellness survey found that 52 percent of Americans say money has a negative impact on their mental health.
However, establishing consistent savings habits is one way to counteract financial stress.
“The psychological benefit of saving can be the sensation of having control,” says Josh Gallogly, CFP, founder of Milestones Financial in Grandview Heights, Ohio. “Specifically, having more control over one’s future through the prospect of having more options to choose from as a result of one’s saving.”
The act of saving goes beyond simply accumulating money — it fosters a sense of agency over one’s financial future. You can create a buffer against unforeseen expenses, while also limiting the likelihood of entering into debt during challenging times.
When people feel secure in their financial standing, they’re better equipped to manage external pressures and have money be less of a constant worry.
7. Helping others
Once you get to a point in saving where you feel comfortable with your various savings funds and have grown your wealth, you’re also able to support causes that go beyond individual goals. That could mean helping out a friend or family member in need or donating to a charity that you care about.
You may want to keep your savings in a high-yield savings account, where they can grow over time. As your savings build, you can contribute more to important causes and gain fulfillment from helping others in their own financial journeys.
Bottom line
Saving money is important for both establishing a baseline of financial stability and getting to explore opportunities beyond just meeting necessities. It gives you more flexibility in your career, more opportunities to travel and the capacity to support causes you care about.
You may want to create separate funds for different savings goals, including an emergency fund, so it’s easier to track how much you’re saving for each. Compare various savings accounts to find the best rate and features and let your savings grow.
