The Importance of Developing Savings Habits
Savings habits are the foundation of long-term financial success. When you develop good savings habits, you are setting yourself up for wealth down the road, and security right now.
Good savings habits are important because they:
Allow You to Create Wealth Now and Later
When you save, you take advantage of compound interest. This means that your money earns money. Whether you keep your money in a high-yield savings account or whether you invest it (and you should really do both), the interest you receive on your contributions itself earns interest. This is powerful.
Over time, this compound interest adds up. It works better the longer you do it. When start by setting aside $100 a month now, it has a greater impact on your finances than if you start setting aside $100 five years down the road. The difference can be surprising. Building wealth requires a solid savings habit, and the results are only increased when you include investing (low-cost index funds can be a good start) in your savings plan.
Shore Up Your Finances Today
You’ve heard that you should “save for a rainy day.” Short-term savings, or an emergency fund, isn’t just about making sure that you have money in the event of an unexpected cost. Having that money saved up can actually protect your overall finances. Without that money, you might need to go into debt in order to cover unexpected costs. Without a comfortable cushion saved up, you could find your finances depleted, and end up in terrible shape.
Good savings habits allow you to protect your finances and prepare for life’s curveballs. Develop that habit early on, and make it a priority, and you will have more time to be ready.
Offer More Lifestyle Choices
Your savings habits today can set you up for more lifestyle choices tomorrow. When you “pay yourself first,” you have more options later. By saving up a substantial nest egg, you have a wider variety of retirement choices. With enough money saved up, you can choose to live in more places (since you can afford a higher cost of living) and participate in more activities.
Even in the present, your ability to save can provide you with more choices. If you have solid savings habits, and good chunk of capital saved up, you have options when it comes to car and home purchases. Additionally, you might be able to choose from a variety of vacation destinations, or you might be able to afford a flight that leaves at a more convenient time.
The reality is that money often equals choice. If you have saved up money, you can afford to make a wider variety of choice, whether it’s buying an upgraded model to replace a broken appliance, or whether it’s being able to live in your preferred neighborhood.
Require You to Think About Your Money
Finally, developing savings habits can help you think about what you’re doing with your money. When you make saving a priority, it means that you have to adjust the rest of your spending accordingly. Deciding to set aside 10 percent, 15 percent, or even 20 percent of your income means that you have to make other choices about where your money goes.
This forces you to think about how you are using your money in other areas. Developing good savings habits might mean that you rethink the number of times you eat out each month, or how often you make impulse purchases at the store. When that money is taken out of your paycheck immediately, it’s not there to be spent, and that forces you to evaluate your other monthly expenditures, prioritizing other areas of your budget.
Thinking about your money is a good thing, since it prevents you from wasting as much as it. The average household wastes 10 percent to 15 percent of its monthly income. When you are aware of the waste, and make it a point to develop good savings habits instead, you can stop the waste and put your money to better use.
Developing savings habits early can set you up for financial success now and later in life. Make it a point to get started as soon as possible.
Miranda Marquit is a freelance journalist specializing in topics related to personal finance, investing, and entrepreneurship. She writes regularly for a number of web sites, including AllBusiness, Huffington Post, and Wise Bread. Miranda’s work has been published at U.S. News & World Report, MSN Money, Fox Business, and Business Insider. Her work has been linked to from USA Today, the Washington Post, and the Wall Street Journal, and she has appeared on NPR Morning Edition and American Public Media’s Marketplace.