Must Knows

The importance of savings

[ecis2016.org] What is the importance of savings and how can one go about doing it? We explain…

Savings: Meaning

Saving refers to a portion of one’s income that is not spent on daily expenditure. It is money set aside for future use and not spent immediately. In other words, savings is the net surplus of funds that an individual or household has, after paying for all expenses and obligations.

People often save money to accomplish objectives in the short-term (such as buying new phones), or for long-term objectives (such as continuing to study or buying a car or a house). Saving money can also help cover unexpected expenses, such as an illness, replacing a broken appliance, or making an emergency trip. In addition, savings can be invested and as a result, you can earn a profit on the money you have set aside. That is to say, not only will you have the funds available to spend later but you will also earn money in the process.

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How to calculate savings rate

Savings rate is the percentage of one’s disposable income that is kept aside, without spending it on obligations or other expenses

Importance of savings

For emergencies: Setting money set aside for emergencies, helps us in crucial situations. Creating an emergency fund, provides financial security in times of need. If you have an emergency fund, you can avoid using credit cards or opting for high-interest loans. Finding ways through a financial emergency in good shape serves as a reminder of the value of preserving money.

For future education: The cost of education is increasing. Student fees are rising, making it difficult to pay for education without debt. Proper planning and commitment, can ensure that your children graduate from college debt-free. So, having a minor savings account is your best bet to save money for education.

For long-term security: it is hard to predict the future and the market. For this reason, having a safety net fund is a good idea. Without saving, you can find yourself in a financial storm. Without investments, you may need to work till you retire. You will always live pay cheque to pay cheque. Saving money is important, because it provides financial security and the more you save, the more secure you will be.

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How to save money?

  • Record your expenses
  • Include saving in your budget
  • Find ways to cut your expenses
  • Set saving goals
  • Determine your financial priorities
  • Create an interest-bearing bank account
  • Annualise your spending

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Savings versus investing: Key difference

Although the terms savings and investment are used interchangeably, there are key differences between the two. Savings refers to liquid funds that are available for immediate use. Investing, on the other hand, refers to using these funds to purchase various assets. Investing is done with the intent of earning a profit but it also carries the risk of loss. Moreover, any investment must first be liquidated, to be used as funds for other purposes.

Source: https://ecis2016.org/.
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Debora Berti

Università degli Studi di Firenze, IT

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