Learning how to manage money wisely is a critical life skill for everyone. When people first set out on their own, they might not understand the importance of setting some of their income aside. It's very easy for people to spend all that comes in and to live paycheck to paycheck; but it is also very risky not to have savings. If a person loses their source of income, they have nothing to fall back on.
Why Save Money
A young person might decide to save money for a number of reasons, from being prepared for unexpected life occurrences, to setting long-term goals. Financial professionals often recommend that people establish emergency funds. An emergency fund should contain at least a few months' worth of income in case a person receives a pay cut or loses their job. Emergency funds can also cover unexpected, sudden costs, such as the cost to repair a car or to pay for a medical treatment.
Along with saving for emergencies, people should also save to reach financial goals. A savings goal can be long-term or short-term. Examples of long-term goals include putting money aside for retirement and saving for a down payment on a house. Examples of short-term savings goals include putting money aside to buy a car without taking out of a loan or saving to pay for a wedding.
Saving money can also help a person avoid going into debt. The more a person has to put down on a house, the less money they will need to borrow. The same is true if a person saves up to buy a car, instead of taking out a loan to pay for it. Setting money aside to purchase a big-ticket item means it will cost less over time, as a person won't need to pay interest on it.
How to Save Money
When it comes to saving money, the more pain-free and simple the process, the more likely a person is going to stick with it. One easy way to save money is to have a certain amount automatically deducted from a paycheck each pay period. A person can also create a savings account that will automatically transfer money from a checking account to savings on a set schedule.
Putting the money into a savings account is one of the most secure options. Savings accounts are insured against loss. Money in a savings account will also earn interest over time. A person might be able to earn a higher return if they invest in the stock market, but they are also likely to lose some of the money they originally invested, if the stock price declines.
Along with setting money aside on a regular basis, a person can save money by reducing the amount they spend. A common recommendation is to cut out all spending on non-essential items, such as meals at restaurants, fancy coffee drinks, and entertainment. A person can also set a strict budget for themselves if they don't want to completely cut out all non-necessities. For example, instead of dining out two or three times a week, they can dine out once or twice a month.
Cutting costs at home and putting the money that would have gone towards utilities or rent into savings is also helpful. One way to trim utilities is to use less energy. For example, a person can set their thermostat to 68 degrees Fahrenheit in the winter to reduce the cost of heating. They can also set the thermostat a bit warmer in the summer and avoid using the air conditioning when no one is home. Another way to cut costs at home is to cancel their cable subscription or trim their cell phone plan.