The Importance of Savings (December 2022)
Updated: Jan 2
Dr. Mercy Otieno, Ph.D. Economics and Finance
© International Foundation for World Freedom
THE IMPORTANCE OF SAVINGS The dictionary definition of savings is the amount of money put aside for emergencies after subtracting expenses and other obligations. Money held in savings accounts is normally very safe, although they attract low rates of return compared to other investment accounts. Why do we save money? Saving comes with numerous advantages such as,
Saving helps families and individuals live stable life. One can save short-term or long- term. In the short term, it is advisable to have money equivalent to three months worth of living expenses. While in the long run, one should save for retirement without running out of funds.
Putting money aside helps in cases of emergency such as unexpected events, health issues, disasters, and global pandemics.
Having money set aside helps ease mind and stress especially when one is in financial distress and tight money situations. Like cases of job loss, and unemployment, knowing that you will be able to pay your bills and feed can help reduce distress.
Saving gives you financial freedom, whereby you are ready for the financial issues life throws at you.
WAYS OF SAVING MONEY There are several ways of saving money, the toughest thing about saving money is getting it started and maintaining the culture of savings. Savings can be done short-term and long-term depending on your goals and plans. Whether the goal is short-term or long term you need to consider factors such as;
The minimum balance required for the savings account
The interests rates
How soon you will need the money saved
These are important to help you pick the best savings tools. If the aim is short-term savings consider the deposit accounts (FDIC insured) available in most financial institutions. You can also use the certificate of deposit (CD) which holds your money for a fixed period and provide higher rates than savings accounts.
If you aim to save long-term such as for retirement and children's education, you should consider insured retirement accounts such as IRA. One can also buy stocks and mutual funds and hold them long-term in an investment account. The only downside is that while the IRA is insured by the FDIC the securities are not insured hence you might lose your money.
STEPS TO SAVING MONEY To be able to save efficiently, you need to make some adjustments and records. These include recording your monthly expenses and accounting for all your expenses. Tracking your expenses will help you limit overspending and you can use your debit and credit card statements to guide you.
Secondly, you may want to incorporate the savings in your budget as part of your monthly expenses. Once you have a target work towards increasing your savings as a percentage of your income.
Third, you might want to start cutting on your expenses and identify areas you can cut back on such as spending less on dining out and making more meals at home, switching to cheaper car insurance or mobile phone plan.
Additionally, you might want to cancel recurrent subscriptions you do not use.
Fourth, avoid non-essential purchases and impulse buying, if you need something plan for it and save for it, if you need a house in the future start saving for the down payment now.
Fifth, start small, set achievable goals using your monthly budget, and do not burden yourself. Lastly, saving for long-term goals should be a priority and should supersede short-term goals.
Also note that you should, always review your savings budget, as your income increases, and check your progress every month. Do not change your lifestyle with an increase in income rather use it as an advantage to save more and hit your goals faster.