You know you should be saving money, but how much? How do you start? And how do you keep saving during months where money is tight or unexpected expenses come up?
Don’t worry. We can help you figure it all out.
Start by thinking about your future. Do you want to buy a house at some point? Take a trip in the coming year? Buy a new car? Retire early? Don’t limit yourself to this year or even a five-year plan. This is the time to think big over the short and long term, so brainstorm and write it down.
Once you have your ideas captured, big or small, you can determine how they fit in with your savings goals. Once you have a brief outline, you can imagine what you’ll need to budget to meet each of your goals.
Next, prioritize your goals and compare them to the money you already have saved. Goals that should be top of mind are to create a rainy-day fund and an emergency fund. The rainy-day fund is helpful to cover small and unexpected expenses. The emergency fund covers your living expenses in case of an illness or injury that makes it hard for you to work. You can keep these funds in the same account or set up separate accounts. Either way, these are your most essential tools to protect your finances and prevent you from going into unnecessary debt.
Now, look at the rest of your goals and the time frames you’ll need to save for them. For example, the trip next year will happen sooner than a home purchase in five years, so perhaps make the trip fund a higher priority.
With your priorities in place, assign dollar amounts for each goal. For the rainy-day fund, you might set a goal of $500 to $1,000. Three to six months of living expenses is recommended to have saved in your emergency fund. When saving for your next getaway, you can price out your airfare, hotel, shopping, entertainment, and food.
For your dream house, set a goal for your down payment amount. Many programs are available that allow you to put a down payment as low as 3% of the purchase price, and other programs where no down payment is required. You may choose to put a higher down payment amount to lower the total amount you borrow, allowing you to either choose a shorter-term mortgage or lower monthly payments. Or you may decide to keep some of the funds in your nest egg so you can pay for repairs or home improvements.
With the dollar amounts set, place them into buckets based on how long you have to reach those goals. If you want your rainy-day fund set within six months, divide your $500 to $1,000 goal into six buckets. Then, figure out your emergency fund total and divide that by twelve buckets if you’d like to reach that goal within a year. It’s the same with the vacation fund, although you may strive to have it fully funded sooner so you can buy your tickets and reserve your hotel a little earlier to get the best deals.
You can divide the down payment for your house into sixty buckets because you have five years to reach that goal. Lastly, add all these numbers to get your total monthly goal, and you’re ready to start saving.
So now, how much can you save each month? Are you able to hit these monthly dollar goals you’ve set in the previous step?
First, figure out your budget and cash flow. When you know how much money you have coming in (on average) and how much needs to go out for your necessary expenses, you can see how much you can set aside for your future. If you don’t have a lot left over for savings, you can explore options to cut expenses or adjust your timelines. Or you might consider holding off on savings for a longer-term goal, such as the down payment for your house, until you have fully funded your emergency and rainy-day funds. So, delay that goal for a year and break it into buckets that you’ll start saving for next year.
The key is to keep your savings goals tied to specific life goals so you can keep your motivation strong. If you’re vaguely saving money for the future, it may be harder to make that monthly deposit into your savings account(s). Of course, you can make it easier by automating them through your online or mobile banking account.
With a bit of planning now, you’ll be on track to reach all your financial dreams!