Saving allows you to postpone current consumption for a future time. It is in this way that it becomes a primary means to achieve goals which are not related to satisfying your present needs.

 

Save for Your Goals

To build financial stability and avoid heavy dependence on unforeseen and unfavourable circumstances, your main priority should be to establish a financial reserve. In our culture, we often call it "money for rainy days," while in practice, it is known as an emergency fund or a contingency fund. The purpose of these reserved funds is to cover unexpected changes that lead to higher expenses or lower income. For example, you might need urgent home or car repairs, or unexpectedly lose your job. Other events can affect both aforementioned aspects - during illness, income decreases while expenses for medical check-ups, tests, and treatment increase. For this reason, it is advisable to set aside funds for at least 3 to 6 months for essential expenses, and if your income is irregular (such as in freelance professions), it is best to have a reserve for up to 12 months. Achieving such financial stability should be a priority when saving. If you lack sufficient funds, you might have to take out a loan under unfavourable conditions, and sometimes even that may not be possible.

The second purpose of saving is to help accumulate enough funds for achieving long-term goals. These could include purchasing an expensive item such as a computer or household appliance, saving for a down payment on a car or home, funding education or a professional qualification, etc.

 

Saving or Investing?

Saving is also an option for the longest-term goal - wealth accumulation. However, most people with long-term financial goals prefer to invest their money. What is the difference between saving and investing? When saving, you accumulate your funds in monetary form, whereas investing transforms them into another asset. This means that when saving, there is no risk of losing the nominal value of your money, whereas with investing, there is a risk of losing value if the asset decreases. Since saving carries minimal risk, its return is also low or non-existent. This means that the real value of your funds - their purchasing power - declines due to inflation. In other words, you still lose by keeping your savings in cash. For example, saving is not a suitable method for accumulating funds for retirement, as over 20-30 years, inflation can significantly reduce the value of the accumulated amount.

Investments aim for a higher return, which at the very least can preserve the real value of money (i.e., “beat” inflation). However, higher returns come with a risk, which arises from converting money into another asset whose value can decrease over time. That is why investments are rarely suitable for short-term goals with a timeframe of less than six months. Additionally, using invested funds for consumption may involve additional fees or additional time to gain access to them. This is because nothing is more liquid than your saved money. This means that if you aim to accumulate a specific amount of money in a few months for a down payment on a car, saving may be the better option. Nevertheless, if you have a longer timeframe to accumulate these funds - say two years - you have a greater chance of growing your funds through investments.

 

Pay Yourself First

Human needs are unlimited, which is why money is never enough. However, saving is extremely important - to ensure security, personal growth, as well as to achieve our goals. For this reason, the principle of "pay yourself first" is well-established in personal finance management. If a person plans their expenses first and expects to have leftover money for saving, this is unlikely to happen - precisely because our needs are unlimited. By following this principle, however, savings are set aside in the budget first, and only the remaining funds are allocated for spending. One often assumes that this approach is impossible because the person already struggles to make ends meet. But the truth is, many people live on even lower incomes. The key factor here is one’s mindset - accepting that the real disposable income is what remains after saving.

Different approaches exist for "pay yourself first." For instance, saving a fixed percentage of your income - preferably 10 to 15%, ideally 20%, but not less than 5%. Alternatively, you can set aside a specific nominal amount. Once enough funds are accumulated in the emergency fund, and if there are no other short-term goals, these savings can be invested.