Many people think that they should save some money for the future. That is incorrect. Saving is not something we should do. It is something we MUST do. Here are three reasons why.
1. Those rainy days
Life is full of unexpected twists and turns. In the immortal words of Forrest Gump, “shit happens”. We do not want it, but more often than not, we cannot prevent it. So it only makes sense to have some financial reserves to call upon should something bad happen.
Experts advise that we should set aside enough money to be able to meet at least one year’s worth of financial liabilities for your family. In other words, if your family spends $20,000 a year on basic needs (e.g. food, transport, children’s school fees, housing mortgage repayments or rental), then you should have at least a reserve of $20,000 that you can easily tap on.
It would also be wise to buy some form of medical and accident insurance that can cover most, if not all, your expenses should you fall catastrophically ill or get into a serious accident.
2. Foreseeable big-ticket items
You would like to get married soon and would love to have a wonderful wedding. Or you are planning on having kids. Or getting a new, bigger apartment. Or your kids are growing up and you would like to be able to pay for their college tuition fees. Or even a good well-deserved vacation. Whatever the case is, at different stages of our lives, there will be fairly big-ticket items that we hope to be able to pay for.
Of course, there is the possibility of getting loans from banks. But rather than rely completely on loans, it would be wise to be able to pay at least a significant portion, if not the entirety, of the costs using your savings.
That said, there is nothing wrong with taking loans from banks. In some situations, it might actually make financial sense to take loans for certain purchases from banks even if you have enough savings not do so. This happens if you have set aside money in some form of investments that give you a higher return than the interest rates that you are paying on the loan. So rather than taking your money out from such investments to pay for the big-ticket items, it would make sense to take a loan and let the returns from your investments pay for the loan.
3. The option to retire
There is nothing wrong with working for as long as you can, even up to the ripe old age of 70 or 80. But it would be nice to be working when you are old because you actually love what you do and you chose to continue working rather than working because you still have to earn a living.
In order to have the luxury of such and option, it is imperative to set aside money in some form of investments that would help grow your wealth sufficiently for you to retire at a reasonable age. The type of investment depends on how much time you have before you think you would like to retire and your risk appetite.
The two are somewhat related. The earlier you start saving and investing for your retirement, the more options you have and the more risks you can take for a potentially higher return.
Also, your risk appetite should depend to the amount of money that you can lose without adversely affecting your short-term, mid-term and retirement plans significantly. In other words, if you can lose a sum of money in a high risk but potentially high return investment and not have to tighten your belt too much or scuttle your plans to buy foreseeable big-ticket items (see above) or delay your retirement by much, then it is alright to take the risk.
Whatever risk you are comfortable with, it is advisable, when investing for retirement, to put your money in investments that give you returns that match the rate of inflation.
Start saving now!
Make it a point to start setting aside some money as savings and investments for the future. Knowing that you have some reserves to tap on when bad things unexpectedly happens, to fund your big-ticket items at crucial stages of life, and to have the option to retire can bring a peace of mind and lead to much greater happiness.
[Featured image from MoneySmart]