How Growing Your Savings Can Help You Live Richer
Day 9: GOBankingRates wants to help you Live Richer. Throughout the month of July, we’ll be sharing daily tips for how you can do just that, with advice on budgeting, saving, investing, making the most of your career and managing debt — plus money advice for every phase of your life. Check back each day during our 31 Days of Living Richer to learn everything you need to know to set yourself up for financial success and live the richest life possible.
It’s hard to find someone who doesn’t want to Live Richer. With so much information out there, how does one know where to start? That’s why I asked a few of my favorite experts how and why they believe saving money is the first fundamental step to living richer.
It Gives You Peace of Mind
“Having savings allows you to reduce your overall stress and increase your mental well-being,” said Ted Jenkin, CEO of oXYGen Financial. “It puts you in a position to take care of financial emergencies while also being able to seize financial opportunities.”
Sam Dogen, founder of FinancialSamurai.com, also emphasized the mental health benefits that come along with growing your savings.
“Savings is crucial for your mental health,” he said. “Without savings, you can’t live as freely or take advantage of opportunities.”
José Figueroa, a Christian personal finance coach, has experienced this peace of mind firsthand.
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“Emergencies have become simply inconveniences now that [my wife and I] have an emergency fund,” he said. “If the car breaks down we fix it. If an appliance wears out we replace it. It took time and sacrifice, but we no longer worry about where the money is coming from or have to decide which credit card has the most available balance.”
It Gives You Security
“Simply put, savings gives you security,” said Jim Yih of RetireHappy.ca. “Without savings, you are at risk, exposed to unforeseen circumstances. The more savings you have, the more security and comfort you have. How much safety and security is important to you? The minimum standard is about three months of income but many prefer to have more security.”
If even three months seems undoable, however, you can start small to start building up that financial security blanket, said Tom Drake, founder of MapleMoney.com.
“I suggest just getting started with a goal to save up one month of expenses in a high-interest savings account, then working your way up to larger amounts and more peace of mind,” he said.
It Teaches You Patience
“Since my wife and I made the decision to no longer rely on credit cards for purchases (five years and counting!), we had to learn to wait until we had money saved for what we wanted to buy,” Figueroa said. “We have gone from the ‘microwave’ approach to buying to the ‘slow cooker’ approach. We take our time and we make better choices when we buy something. It takes time to save, and we want to make sure we get the best for our money on large expenses.”
Derek Sall, owner and blogger at Life And My Finances, agrees that when you’re patient about making your purchases, you’re more likely to make better spending decisions.
“It makes you wiser with the money you have,” he said. “It’s so easy to buy something with credit, which often results in more thoughtless, frivolous spending. If you have cash, you learn to use as little of that cash as possible.”
It Gives You Flexibility
“People with adequate savings maximize their financial flexibility, unlike those who are saddled with excessive debt,” said long-time financial blogger Len Penzo. “As a result, they always have more choices available to them — that’s real financial freedom! Saving money isn’t just about the money you put away; it’s also about the money you choose not to spend. It might seem difficult at first, but if you set up a detailed budget, you may find several aspects of your life where you can make small changes that ultimately will have a large impact on your budget.”
It Opens Up New Possibilities for Your Children
“When you save for college expenses, you can give your kids the gift of starting their professional life without a mountain of debt,” Figueroa said.
Where To Put Your Money: Savings or Retirement?
Linsey Knerl, author of “Homeschool Hacks: How to Give Your Kid a Great Education Without Losing Your Job (or Your Mind),” said that having savings is essential as a mom of six kids.
“There’s never a shortage of things that pop up when it comes to kids’ needs,” she said. “I like to set aside a ‘right now’ education and activities account that’s separate from a standard college account. These funds can cover things that need to be paid while a child is still in your home, but that may be more expensive than the standard discretionary budget can cover. Things we’ve used these funds for include summer camps, last-minute invitations to cultural events, special workshops at local colleges, and even homeschool courses and textbooks that may be offered at special times of the year for a big discount. Knowing the opportunity cost of not letting your kids participate is huge, so be sure you set goals on what each child should get out of a program or opportunity before you dip into the savings fund.”
It Allows You To Weather Stock Market Swings
“One of the biggest benefits of saving is being able to stay calm during stock market falls,” said Julie Rains, writer and publisher at Investing to Thrive. “Being calm gives you the freedom to do nothing while you wait for the recovery or buy stock picks at lower than usual prices. Either way, you are able to withstand shakiness in the economy because of savings.”
It Helps Prevent You From Going Into Debt
“With today’s low interest rates, you might be tempted to forgo a robust savings account. But, consider the perils of living paycheck to paycheck,” said Barbara Friedberg, finance expert at Barbara Friedberg Personal Finance. “If you don’t save and you have a large bill, such as a car repair, you may need to borrow from your credit card, or not pay the full amount at the end of the month. If you don’t pay your credit card bill in full, you will be liable for interest on the ‘loan’ you are borrowing from the credit card company. The interest rate can run up to 20%. The cost of that $1,000 loan is nearly $200 for a one-year 20% interest rate loan. On the other hand, if you’d kept a cash cushion in your bank account and paid the bill from that bank savings account, you would have saved the $200 interest payment. In the long run, every extra dollar spent on high-interest-rate debt is keeping you from becoming richer tomorrow.”
Donna Freedman, personal finance journalist and author of the “Your Playbook for Tough Times” series explains it this way: “I like to remind people about the opportunity cost of not having any savings. When you have to put something on a credit card and can’t pay in full when the bill arrives, you’re paying interest — maybe a lot of interest, depending on how long it takes to pay off the card. Every dollar in interest is a dollar that can’t work for you any other way. You can’t put it in your retirement fund or your vacation fund or your kid’s college fund. It’s just gone.”
It Gives You a Safety Net in Case of Job Loss
“Living paycheck to paycheck works only if you will always have that paycheck — but you won’t,” said Ric Edelman, founder and chairman, financial education and client experience, at Edelman Financial Engines. “You’ll quit, get laid off or fired, become disabled or retire. When — not if — one of those events occurs, you’ll lose your paycheck. But your bills will persist. In anticipation, you must set aside some of your current income so you can pay future expenses. Set aside 15% of your pay, starting now.”
It Allows You To Enjoy Life
“Having savings means that I enjoy the good things life has to offer without guilt,” said Maria Nedeva, creator of The Money Principle and author of “Never Bet on Red: How To Pay Off Debt Fast and Live Debt-Free Forever.” “I buy flowers every week and go away on regular breaks.”
Day 10: Join us tomorrow for our Living Richer series when we discuss how investing a little each paycheck will go a long way in the end.
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Gabrielle Olya contributed to the reporting for this article.