Every so often I get asked some pretty weird questions about money. More than once I’ve been asked about why I continue to save. At first I really didn’t understand the question. I’m not rich, nor do I have some guaranteed income stream, so why wouldn’t I save my money?
I later realized that it was my frugality they wanted to know about. They didn’t get why I continued to save when I had the money to afford the things I wanted.
Being frugal is a choice; it’s pretty much a mindset for me. I prefer to look for cheaper alternatives because the money I save can be spent on the things I really enjoy. Experiences are what I value most so if I want to spend money on travel, I need to build savings first. What I value differs from others; what’s important is recognizing why we should save.
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Starting with good habits
Saving came naturally for me since my parents taught me at a young age to save. I still remember my dad telling me that the bank would pay me interest if I deposited my money with them. I only had a few hundred dollars at the time, but I was hooked on earning money without having to lift a finger.
When I landed my first job, my parents advised me to put aside a portion of my income towards retirement. Not only was I paying myself first, I would also get a tax refund from the government for making RRSP contributions.
Not everyone is taught how to save money at a young age, but having good saving habits can go a long way.
Saving for the short term
I felt empowered by saving money. I never carried a credit card balance and it felt great. But after a while I had to ask myself what exactly was I saving for? A wedding, a car, and a down payment for a home could potentially come at any time so I had to prepare myself.
Saving wasn’t an issue, but I wanted my money to work for me while keeping in mind I might need access to that money soon. They may not give great returns, but investing in GICs or parking my cash in a high-interest savings account would guarantee me security and pay me some interest. When saving for the short term, keeping your money safe is a priority, and these types of investments are relatively risk free.
Saving is important, but you also need to understand what you’re saving for and your timeframe.
Saving for the long term
We all know that we should be saving for our retirement, but how many people are actually doing it? I prioritize savings because I know it’ll pay off later. Knowing that I’m on track to live a comfortable retirement makes making small sacrifices right now easy.
The other advantage of saving early is the power of compound interest. If you’re not familiar with compound interest, it’s the interest added to your savings that also earns interest from then on. So if you start saving for retirement in your 20s, your investments have a ton of time to earn compound interest. That’s a lot of extra money earned simply by saving early and for the long term.
Just saving money isn’t good enough these days. Inflation will slowly eat at our returns so we need to invest our savings. Having good saving habits, picking the right investments, and setting targets will help you reach your savings goals.
Flickr: KMR Photography