We all know we need to save money.  It’s quite a focus for many people, however most of us have trouble following through with it.  From a young age we’re told we need to save for something, which makes the idea of creating an emergency fund (that’s not to be spent unless under dire circumstances) even more difficult.  So does saving money really make that big of a difference?  After all, we live in a time where loans (whether it be for home, car, or education) have become the norm.

Well, contrary to the convenient practice of living without a savings, and borrowing when emergencies arise, here are three reasons for why we not only need to save money, but also save for specific costs.

1. Your house.  Renting is almost never cheaper than buying, especially with how low home prices are currently.  While most people cannot afford to save enough to pay off a house in cash, you do need a savings for the down payment and closing costs.  The larger your down payment is – the less you have to borrow and pay for things like Private Mortgage Insurance (for down payments under 20%).

2. An emergency fund.  This is really important because we can never predict the future.  If you own a home – your emergency fund could go towards things like a leaky roof or broken furnace.  If you get in a car accident, that emergency fund could be paying for half of a car.  And lastly, if you lose a source of income, that fund can hold you over until you get another job.

3. Your retirement.  It really pays to start saving early because the interest will compound.  The first thing to contribute towards is your 401(k) if your employer does a partial match.  Next, a Roth IRA will give you more control over which stocks and funds you want to invest in, so contribute to this when your 401(k) is maxed out on employer matching.  Lastly, don’t let  your emergency savings sit in a checking account – invest it in short term CDs so that the only penalty for early withdrawal is losing some of the interest payments.  This way you earn money on the money you’re not using.

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