The Importance of Saving

Erika Gonzalez Unlock technologies staff writer

Key takeaways

• More and more Americans say they are living from “paycheck to paycheck”

• Failing to build a financial cushion can make it difficult to deal with unexpected expenses

• It’s important to set a savings goal and do your best to stick to it

Prudent souls have been preaching the benefits of saving money for hundreds of years – the concept of reserving funds for a rainy day actually dates back to an Italian play written in the 1500s – yet it seems the message still isn’t getting through.

Paycheck to paycheck: when there’s nothing left

The most recent Paycheck-to-Paycheck Report from PYMENTS and LendingClub found that 61% percent of American consumers – an estimated 157 million adults – were living paycheck to paycheck in April 2022, meaning they had little to nothing left over after covering monthly expenses. That figure is up from April 2021, when 52% of survey respondents reported living paycheck to paycheck.

The increase suggests that inflation is taking its toll on American households, making it difficult to stretch paychecks as far and build savings for the future. But living with limited savings is a risky proposition. Here’s why:

• Failing to build a financial cushion can make it difficult to deal with unexpected expenses like major car repairs or medical expenses that may not be covered by insurance. Half of all Americans said they faced a large, unexpected expense in the last six months, according to data gathered by Freedom Financial Network in the spring of 2022.

• Consumers lacking adequate savings are often forced to take on debt to pay for surprise bills or larger-than-anticipated expenses. The Freedom Financial Network survey found that 32% of those facing an emergency expenditure would use credit cards to cover the bill.

• Unfortunately, raging inflation not only makes it more challenging to cover regular expenses, but also means that it will cost even more to replace that dishwasher or fix that broken dental crown.

It’s clear that building cash reserves is more important than ever but getting started can seem daunting.

Consider these savings strategies

Evaluate your spending.

Look at your bank statement to see where your money is going every month. Some personal finance experts recommend that consumers devote 50% of their income to needs, 30% to wants and 20% to savings/paying off debt. If the wants seem out of whack compared to savings and needs, it might be worth cutting or trimming some items, such as eating out or entertainment, to allocate more funding to savings. There may also be ways to save money on essentials. As an example, consider transportation costs. With high gas prices, public transportation could prove a cheaper alternative. For utilities, adopting budget billing will make it easier to predict how much you’ll spend each month and will allow you to budget accordingly.

Set a savings goal.

Determine how much you need to save and for what purpose. While some experts suggest anywhere from $500 to $2,000 to cover expenses, others say building up to three months of living expenses is recommended. Tracking past unexpected expenses will give you an idea of what to plan for in the future. It’s also wise to take stock of what might be on the horizon. Is your car overdue for a tune-up? Are your pets in good health? Are there home repairs you’ve postponed? Making a list of those potential costs will help you figure out how much you’ll need to pad your savings.

Open a savings account.

Consider keeping your cash reserves in an interest-paying savings account instead of your checking account to prevent those funds from automatically going toward regular expenses. You may also think about setting up an automated transfer from your checking to your savings account to keep funds reserved.

Tap technology.

To start saving without having to think about it, consider using a “round-up” mobile app that automatically rounds up your purchases and deposits the extra funds into a savings account. Options include Chime, Acorns, Qapital and Qoins.

Divert some of your salary to savings.

Another option to automate savings is to check if your employer offers the option to split a certain portion of your direct deposit between your checking and savings account.

Boosting your savings can help you avoid taking on new debt, better handle rising prices and provide peace of mind. it’s high time to heed the call to save pennies for a rainy day.