Saving money is not an easy task. People talk about saving money constantly. When I hear people complain that they wish they could save more money it always gets me thinking, why can’t these people save more?
One of the most common reasons I’ve noticed people struggle with saving money is they have no goal. A lot of people want to save just to have a savings, but without a specific goal in mind, it is very easy to find an excuse to spend your money elsewhere.
I’m going to breakdown how to set a an attainable goal that will make it much easier to save money.
Step 1: Choose What You Are Saving For
There are various reasons to save money. While you can want to save money just to have it saved, there is generally an underlying reason you want to have money saved. For example, maybe you want to build an emergency savings account that serves as a cushion for that “just-in-case situation.”
Knowing that is the purpose for the funds you are saving helps make it easier to want to save the money. Do you have any bucket list places you want to visit? If so, you’ll want to save up a vacation fund to be able to afford that trip.
Maybe you are saving for a house because you are sick of renting. The most common goal that almost everyone is working towards is saving for retirement, though.
Whatever the case, figuring out whatever it is you want to save for is the first step to putting yourself on the right path to saving money.
Step 2: Establish How Much You Need to Save
The next part of setting your savings goal is figuring out how much you need to save to attain your goal.
To figure this out for our vacation fund, we went through all the motions of booking a trip to Hawaii down to the exact rooms we would like to stay in at the hotel and added that amount to the cost of airfare and estimated how much food, drinks and excursions would cost us. This total number is how much we need saved for our trip to Hawaii.
Apply this same concept to whatever you want to save for. For an emergency fund, figure out how much would make you feel comfortable in an emergency.
For retirement, figure out how much you need to live the type of life you want when you are retired (related post: Why Not Retire at a Dollar Amount Instead of an Age?).
If you’re saving up for a house, determine the budget you have in mind and calculate the down payment needed for you to comfortably afford the house.
Step 3: Determine the Length of Time
The next step, naturally, to determining how long before you need that money. For example, my Hawaii trip will be in the summer of 2018. From the time of this post until then, I have 9 months left to reach my savings goal for the trip (my husband and I have been saving for over a year already).
If you’re saving for a house, figure out when you’d like to have that house by. Maybe you’re saving for a Christmas gift fund, so you need to have the money saved in time to buy presents for loved ones. Maybe you want to have a certain net worth by a specific age. Whatever the case, choose your deadline.
Step 4: Calculate How Much You Needs to Save in Smaller Intervals
I personally like contributing towards my savings goals monthly (except for retirement contributions through work which are taken out of every paycheck), but you can choose any period of time you wish. See the example below:
Cost of trip to Hawaii: $10,000
Length of time money will be saved over: 2 years
Savings intervals: Monthly
$10,000 / 24 months = $416.67 to be saved each month
Step 5: Decide How to Save
My personal favorite method for saving money is to set up automatic transfers to a separate bank account. Online savings accounts have a much better rate than your average commercial checking/savings account at your bank.
I’m personally a huge fan of Ally Bank (whose rate is currently over 1.2%). Automatic transfers are great because the money is taken out of your account without any effort from you once it’s set up.
Other savings methods are linking 2 accounts and transferring the money each month on your own, saving cash and keeping the money mixed in with other savings; however, beware because these methods make it easier to spend the money on something else since it is so easily accessible.
Always remember to reevaluate your goals to make sure you are on track. You can always change how much you are contributing each month or change the frequency of your contributions. It is a good idea to check in frequently in order to make sure you are on target to reach your goal and seeing your progress is always good motivation!
