Today we're celebrating National Savings Day! Savings is the foundation of financial success. Saving money can be a convoluted goal at times, especially for people living paycheck to paycheck or struggling with a mountain of debt. Let’s face it, most Americans have taken on the burden of debt at some point in their lives due to unexpected expenses, emergencies, or even health care bills.
We all have financial goals that we want to achieve and the best way to achieve them is to ensure we are saving money for the day to day goals as well as our larger future goals. So we’ll discuss some ways to help achieve your financial goals and stay debt free.
How to Save
We would all love to save as much money as we can as quickly as possible. However, there are many factors to consider when starting a savings plan. Here are a few tips and tricks to help guide you on your savings journey.
1) Figure out how much to save
When you’re deciding how much to save, it’s important to consider your monthly income, bills, and savings goals.
The one thing that is the same for everyone is that every little bit that you contribute to savings helps.
Set a goal for yourself and stick to it. One method is the 50/30/20 rule of thumb which is 50% of your after-tax income going to necessities, 30% going towards discretionary items and 20% going to savings. There are also tools available like Acorn
, which allows you to invest spare change towards your retirement goals.
Your savings should be based on your goals and the timeline of those goals. For example, if you want to save $1,000 towards your emergency fund within a 6-month timeframe that would mean you would need to save on average $167/month in order to achieve the goal. If saving $167/month exceeds the amount you are able to save each month then adjust the timeframe or reduce the amount of emergency fund by ½ and start there.
Set achievable goals and soon enough your hard work will pay off and you will be able to sit back and watch your savings grow.
2) Prioritize your savings
If you have several financial goals you want to achieve at the same time, prioritizing these goals and how much you can afford to allocate towards each goal will help tremendously.
One way is to start with your smallest financial goal and put 10% of your remaining income towards that goal and see how quickly you can achieve it. Once that goal is achieved move on to the next financial goal on your list and try to allocate 15% towards achieving that goal.
Larger financial goals may have a much longer completion timeframe, such as retirement, a car, or even a house. Each financial goal will vary, some may be short-term goals while others may be long-term and may take a few years to achieve.
For retirement savings, many people live by the rule of thumb that you should be saving 10% of your pre-tax income. My rule of thumb is to start saving for retirement as early as you can. See our blog
from last week for some tips and tools on saving for retirement. By prioritizing your savings goals, you will have a better idea of how to allocate the amount you can apply for each of your financial goals.
3) Cut expenses
If the amount of money you have available to allocate for savings is smaller than you would have hoped, then take a moment to review your discretionary expenses and see if there are any expenses you can cut out in order to achieve those financial goals sooner. Take a look at the expenses that could be considered a “luxury” and remove expenses that aren’t absolute necessities. Also, consider where you can save by finding deals and shopping around for your necessities.
Finding ways to reduce the unnecessary monthly expenses will go a long way to helping you save fast!
4) Set up multiple savings accounts
Having multiple savings accounts can help you keep track of each financial goal you’ve set. For instance, I am currently saving for my next car, retirement, regular savings, and my daughter’s college fund. Each one of those financial savings goals has their own savings account. By having their own account, I know what the money is going towards and I know which money to use when necessary. It has been a great way for me to keep track of my savings goals and check in to see if I am sticking to the timeline I set out or if adjustments need to be made.
What should I be saving for?
Now that we have discussed a few tips and tricks for how to save let’s take a moment to discuss some of the big key items to save for and why it is important to have the cash set aside in advance for these items.
1) Emergency Funds
Emergency funds are by far one of the most important items to save for in my opinion. We all have experienced what can be considered an emergency from needing a new car battery which can cost almost $200 depending on the type of car to having your AC unit in your house break which can cost anywhere from $5,000 to $10,000.
An emergency fund is for those unexpected/pricey/unplanned events that occur throughout our lives. Having an emergency fund for those types of events can reduce financial stress and potential credit card debt.
How much you find necessary to save for an emergency fund is completely up to you. Some consider $1,000 a great emergency fund while others would consider $10,000 an appropriate amount for an emergency fund. My rule of thumb is to save 3-6 months of expenses for your emergency fund. If you are new to savings, start with a small emergency fund of $500-$1,000. Once you achieve this goal, calculate your monthly expenses for the next 3-6 months and begin saving for that financial goal.
According to the College Board, the average cost of tuition and fees for a public in-state four-year college for the 2017 – 2018 school year was approximately $9,970, that’s $39,880 over four years. Approximately $10,000 a year is a hefty sum of money to conjure up on top of other financial obligations, thus saving for one’s college tuition is a great financial goal.
I was lucky enough to have my mother finance my undergraduate degree. Unfortunately, she had to do so by borrowing money in the form of student loans which increased her debt. To assist with the cost of my daughter’s college tuition, and avoid going into debt, my husband and I have set up a 529 plan for her and contribute around $250/month.
We started this account before she was born and estimate that by the time she goes to college in 18 years the cost of a four-year degree will be around $50k. Thus by saving $250/month between monthly contributions from us and birthday contributions from her grandparents, we should be able to fund her college without having to go into debt.[wp_bannerize_pro id="1235-2"]
There are plenty of ways to save for college, see our piece on saving for college and 529 plans
for more information.
3) Large assets
Saving for larger purchases such as a house or car can be extremely helpful. When you apply for a car or home loan the more cash you have for a down payment the more money you can save in interest over time.
Reliable cars vary in price but still cost at a minimum several thousand dollars to purchase. Saving for a car prior to needing one is a great financial goal as the more you have to put towards a car the less interest you will end up paying over the life of the car loan. Car payments depend on the type of vehicle you purchase, but generally, a monthly car payment starts at $200 or more. If you set a savings goal to be able to pay for your next car or your first car out-right you would essentially be saving more money in the long run.
The same applies to homeownership. There are a limited amount of home loans that do not require a down payment in order to assume a home loan. The more you put down upfront helps with the amount you will save in total in interest. Most home loans require anywhere from 5%-20% down payment to secure the loan. If the home you were looking to purchase was $100,000, you would need anywhere from $5,000 - $20,000 to secure the loan.
Homeownership is a big commitment and one that is a much easier goal to achieve with a savings game plan. Saving for larger ticket items is a very financially sound investment so figure out if you have any goals to own a large asset and begin strategizing a plan for making those goals a reality.
Retirement is probably the biggest financial goal that most people will set for themselves. Most want to retire at some point in their life, but that point will vary from person to person. The average retirement age in the US is 63 based on the U.S. Census Bureau data. Depending on what age you choose to retire or even scale back the amount that you are working will determine the amount that you should save.
The rule of thumb is to start saving as early as possible as every little bit helps enable you to retire. There are numerous tips and tools to help you save towards retirement. Such as a savings account with your bank, investment in stocks and bonds, and investment in other assets such as real estate.
The amount of income you choose to contribute to your retirement is up to you. If your company offers a 401k plan you can contribute to that’s a good place to start. Some employers will match your contribution up to a certain percentage. If you’re able to contribute up to the maximum matching amount that’s an awesome way to build your retirement fund with free money. Either way, your contribution would be doubled if you have this option.
Or you can take 10% of your income and invest it into mutual funds, stocks, or bonds. Whatever savings method works best for you to ensure you will be financially sound by the time you are ready to retire. Take a look at our long-term savings blog post
from last week for some more information on saving for retirement.
Remember it is never too late to start saving and there is no amount too small to save. I hope the four points mentioned above will be helpful to jump-start or assist with your savings journey. List out all of your financial goals and then begin with the smallest one. Once you achieve that goal you will revel in the amazing feeling that comes along with it. Use that momentum to start tackling some of the larger financial goals on your agenda and soon enough your savings will start to stack up.
If you still feel that saving is just too hard for you I would encourage you to save a dollar a day for a month. At the end of the month, you will have approximately $30 of savings. No amount is too small to save, so figure out what method works best for you and let’s start saving!
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