If you can master this one thing (saving) then you’re going to be in a better position that most people, regardless of the other financial moves you make. This is truly the most important takeaway. Let me give you 3 reasons why it’s important to save:
Reasons to Save More
1. Life’s Emergencies
Unless you have some sort of magical insurance policy that covers everything, you’re going to run into the occasional emergency, or at least an unexpected expense that you can’t pay for with your regular monthly income. Short-term savings can act as an emergency fund against life’s unexpected turns.
For instance, you might experience a job loss, and your primary source of income is temporarily suspended. If you had a bit of savings built up, you could meet your monthly expenses and at least temporarily weather the storm. Read more about how to save for emergencies.
2. Your Major Planned Expenses
But there doesn’t have to be an emergency to justify the need for short-term savings. Think of a vacation you’ve been wanting to take, or maybe an upgrade to your home you’ve been wanting to make. How are you going to pay for these bigger expenses?
The best way is to save up the money for these expenses over time, prior to when you actually need the money.
Instead of saving first though, we often decide to finance the planned expenses on debt. That leads me to my last reason saving it so important.
3. Avoiding Debt
Without savings, we typically turn to debt to get us by when the unexpected happens. Financing an emergency or a major expense on credit can be costly. Interest charges alone can quickly turn a moderate purchase into a big mistake. Debt is a poor substitute for a fully funded short-term savings account.
How to Save More: Separation and Automation
I know you want to save more. That’s why I’m going to tell you exactly how to make it happen. These are the two specific steps you need to take to actually save more of your money:
- Separate your savings account from your spending account
- Automate direct deposits into the savings account
That’s it. That’s all that you need to do. For more on this concept, check out this free guide, PT’s Quick Guide to Truly Saving More.
I encourage you to read through that guide if you haven’t already. The concept there is truly the “golden ticket” of personal finance. It’s the best thing I have to offer you.
High Interest Savings
Lastly, I’ll just add a quick note about the best place to stash your short-term savings. It’s no secret that I’m a huge fan of the online savings accounts, like Capital One 360, FNBO Direct, and even SmartyPig.
These are all great savings products that will help you on your way to increased savings. I use them personally and could not recommend a better financial product.
To learn more about your options with online savings accounts, see my review of high-yield savings accounts.