This is really the most important question. And the answer is likely going to be as individual as the person, with common themes visible in most. We only live life once, and more and more people are wanting to live their life to the fullest at every age instead of just in their 70’s. While not quite YOLO (You Only Live Once), there is a temptation to put off saving for just a little bit longer. Before you know it, you are in your 30’s or 40’s with less than $10,000 to your name. You had a great time, but are behind the eight ball. Others who may travel, explore, or “live” less fall into the same trap by putting off savings as normal expenses come up. The number of those 50 years and older who don’t even have $100,000 saved/invested is staggering. Most retirement calculators will say you need over $1 million saved as you exit your career. Additionally, the pressure to help with children’s college, wedding, or first house can push back any hope for retirement even further.
If we don’t know what we are saving for, then we won’t be consistent in saving. Or, maybe we will realize we don’t need to save anything at all (doubtful). So, why might we want to save?
Common Reasons to Save
- Rainy Day or Emergency Fund
- House Down-Payment
- College
- Wedding
- Upgraded Vehicle
- Generating Passive Income
Making the Reasons Personal
What are your goals?
Housing
Would you like to own a home, or even have the possibility if the need/desire arises? Per the US Census, the 2010 Median Home Price in the United States was $221,800 (Source: http://www.census.gov/const/uspriceann.pdf). A 20% down payment would require $44,360 saved, with an additional $5-15,000 for the fees, costs, and escrows required when purchasing a home. While you could buy a house with less than 20%, the extra mortgage interest and PMI makes it less than ideal. And the more you save and put towards your mortgage early, the less you pay in total interest. It is not unheard of, even in the current low interest rate market, to pay close to the value of the mortgage just in interest. So, for a $200,000 house, you will end up spending more than $300,000 between principal and interest.
Or maybe you want to continue to rent to have flexibility or less responsibility with maintenance (as of 2016, this is why I rent). Rent prices can go up or down, and are not something you can control. Nor is the availability or consistency of jobs that pay what you expect. The Great Recession taught us that. Let’s say your rent for a decent place is $1,000/mo (high in some places, but definitely lower than many). You would need $6,000 to $12,000 to $24,000 saved just in case you were unemployed or underemployed for months to years. Could you raise your hand in the affirmative if asked about having that much saved for a rainy day/poor economy?
Vehicle
Auto loans are expensive, but handy. They get you a decent car, even when you don’t have 100% saved up. First, let us define a decent car. Something under $10,000 (and even as low as $1,000) will provide you with a safe, decent, reliable vehicle to get to your job or chauffeur the kids around in. My wife and I purchased a 12 year old minivan for $1,500 that has worked decently reliably for us. All repairs and maintenance the van has needed over the past 4 years has cost us less than another $1,500 easy. Spending a little more on the front end will get you a nicer, even more reliable vehicle, like when we purchased my daily commuter. It is a clean, low mileage, 7 year old sedan with a four cylinder engine that runs like a dream. There is no need to spend more than $10,000 on a vehicle, let alone $30-60,000, when you haven’t saved at least a couple hundred grand for retirement and a rainy day. And the more cash you put up front, the less the vehicle (a liability you are wearing out) will cost you.
Travel, Fun, or Hobbies
Putting a vacation on an already maxed out credit card is no fun, and makes zero sense. Every time you charge something, you are mentally doing the math to make sure you have the room. Instead, save the money, budget a trip, and then enjoy it! You know what you can afford, and the trip won’t be as expensive due to interest saved.
The MOST Important Reason
FREEDOM and CHOICES! How many enjoy a Sunday evening when you fantasize about not going in to work on Monday, only to realize you wouldn’t make next month’s mortgage or rent payment, the car payment, or the credit card payment if you lost this job? I have been there and it is not a good feeling. While most may not quit their jobs once they have a rainy day fund, just having that stress gone is worth its weight in gold. And beyond that, savings and investments can and do create opportunities for you and your family to enjoy life, help others, and be more secure. “The rich rules over the poor, And the borrower is servant to the lender.” (Proverbs 22:7)