Importance of Saving Now

We’ve all heard the mantra that you need to save your money. But, why is saving so important especially when you already have a tight budget? What do you need to save for?

It is important to start saving now so that you have enough money for an emergency fund. An emergency fund is a fund that you can draw upon if you lose your job, need to buy a new car, or another unexpected expense comes up. The general rule is to have 6 months salary/living expenses saved up and this can take a long time to accrue, especially if you are in school. Start with a goal of saving one month’s living expenses and slowly increase it to two, three, and eventually six months.

It is also important to begin saving for retirement now. You may be thinking, “Really, I need to start thinking about retirement now?” Yes! Putting away even just a little bit now, can really add up because of compound interest. Oblivious Investor provides the following table:

“The following table shows the inflation-adjusted wealth an investor would accumulate by age 65 if she invested $5,000 per year (starting at either age 22 or 35) and earned real returns of 3-5% per year.

Assumed Real Return	Starting at Age 22	Waiting Until Age 35
3%	$458,599	$257,514
4%	$600,147	$308,507
5%	$793,501	$371,494

So, yes, there’s still a large benefit to starting early. In fact, one could argue that low return expectations make it even more important to start early.”

Wonder how compound interest works? Check out this video by commoncraft.

You may be thinking: “Grace, this is all well and good. But where do I find this money to save?” It’s simple. Pay yourself first. Instead of saving whatever money you have left at the end of the month, take some money right off the top of your paycheck and save it. Most banks and credit unions feature an automatic transfer so you can transfer money from your checking to your savings every month without even thinking about it. Chances are you won’t even know it is gone. When I was in school, I started by just saving $25/month and it definitely added up over the course of the year. The more you save, the more you invest in your future.