Whether you’re just joining the work force or are a seasoned vet, we all have personal savings goals that we have in the back of our minds. The problem is, there’s no easy (or quick) way to successful reach them. Things like a down payment on a house, a vacation each year, a new car, some extra retirement contributions, among other things, these are all examples of personal savings goals most people have in mind.
Sure, many people have an idea of what these things will cost, leading them to start setting aside money for each, but they fail to use a coordinated plan. To help combat that issue, we’re giving you five tips that’ll help you reach your savings goals quicker thanks to some objective number-crunching and formulas.
Based on your needs and timelines, you’ll save different amounts for different personal savings goals each month. Rank these savings goals in order of importance, or which ones you want or need to fund first to begin creating your savings plan. Over time, your priorities will likely change based on your relationship status, job situation, need to pitch in for parental care or if you have children and any other unknown expenses.
By ranking your savings goals in order of importance, you quickly make decisions about which you can temporarily defer, eliminate or set back a few years. This will help you be more proactive when you face life changes, rather than respond reactively. This is especially important when you’re facing an issue with a big emotional impact, such as losing your job or an unfortunate health issue that may arise.
It’s hard to plan for a race if you don’t know where the finish line is. The first step to setting savings targets is to determine the amount you’ll need each month for each of your savings goals, especially if you have multiple ones. For example, you don’t simply want to say, “Let’s save $200 month to build a home down payment.” That might take you many more years to reach your goal, or it might cause you to reach your goal too early. In the latter case, money that you could have used for other purposes, such as paying down credit card debt, will sit in your bank account.
Once you know exactly how much money you’ll need to save for each end goal, determine the dates by which you want or need to reach those goals. This is just as important for meeting your annual vacation target as it is for funding your retirement in 30 or 40 years. By using target dates to help plan your personal savings, you’re better able to accurately and realistically assess whether or not your goals are doable. Setting target dates to reach your goals might result in changing your expectations or lifestyle.
The simplest way to plan ahead this way is to determine the total amount of money you want to save for a goal, pick the date you want to finish funding it, and then divide that amount by the number of months in your timeline.
One way to manage savings goals is to set aside a percentage of your monthly excess income for each target. To do this, look at your rankings of your savings goals in order of importance and completions dates. Next, decide what percentage of your monthly excess income you want to assign to each goal. If you have five goals of roughly equal importance, you can put 20 percent of your excess monthly income to each goal.
For example, you might put 50 percent of your extra money toward your emergency fund to reach a certain goal in one year. You can then stop saving for that and increase your contributions elsewhere. Some goals might be longer-term — like retirement or a college fund for future children. However, the longer you put those off, the easier it is to keep forgetting about them, decreasing the amount you earn in compound interest. This can lead to needing much higher monthly contributions later to play catch up.
The interest on your credit card, vehicle, student loan debt can delay you in reaching your savings goals. Paying off a loan that costs less than 5 percent in interest might not be a good idea if you lose more than that 5 percent in compound interest — such as what you’d earn with a 401(k) contribution. Paying down a credit card with a 20 percent APR might help you save thousands more each year once that card is paid off.
As part of your plan to set personal savings targets, calculate the effect of paying off high-interest debt. Even if you can’t pay off a high-interest card, you might be able to do a balance transfer that lowers or eliminates your interest payments for 12 months or more. When you eliminate credit card interest, you’ll have more to put towards your savings goals.
Lead image via Getty
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