You need to save for retirement, pay off your debt, make a down payment on your dream home, save for your kids’ college education, or maybe a new car or a vacation home. How do you do all this while taking care of your basic needs and everyday expenses? How can you save more?
It is a fundamental question and it may feel overwhelming at first. However, you can take steps to put your spending and saving goals into the right perspective, and start moving in the right direction to achieve your goals. Here are some tips and tricks to help you do it.
Set Goals: What Are You Saving For?
If you want to have a chance at increasing your savings, you have to first be clear about what you are saving for. It is important to start by considering only goals that are meaningful and align with your values. Your values reflect what is important to you and the goals clarify how money can help you live up to your values. Once you identify a number of goals, the next step is to prioritize them by considering both their importance to you and how much time you have to work towards achieving them, what’s called a goal’s horizon. Check out our article on goal-setting for a step-by-step process to goal setting. At this stage, do not worry about having enough savings capacity for your goals. Just prioritize them.
How Much for Each Goal?
Each goal has a cost, and that cost can determine how much you need to save every month. For some goals, the cost is the dollar amount you expect to spend on that goal, like a car purchase. You can simply divide the dollar amount by the number of months in the goal’s horizon. You can also apply a rate of return (like 3%) to your savings, and compute the amount by using a calculator, like this one.
For retirement, common advice is to start saving 10% of your income when you are young and progressively increase your percentage as your income increases. Aim to reach 20% when you cross the half-point of your expected working years.
When you have an estimate of how much you should save for each goal, you have completed the first step. If you can save enough every month towards your top three goals, you are in great shape. Start from the highest priority goals and allocate your saving budget. Your saving budget is how much you think you can reasonably save every month. After you allocate your monthly savings to each goal, automate those savings.
Automate Your Savings
Saving towards long term goals is not easy. We procrastinate, we prefer immediate gratification, and there are many distractions to make us lose track of where our money is going. But you can use these psychological biases to your advantage if you automate your savings. Your spending habits typically adapt to how much you have available in your checking account. By keeping it lean, you will achieve better spending habits. Plus, inertia will make it harder for you to skip a month of savings.
I Can’t Save Enough
After you calculate the amount of money you need to save for all your goals you may find that you cannot afford to save enough. What then? That is the reason we prioritize. Start with your high priority goal, and fund that, then move down your list. In general, consider the saving targets as something to work towards. If you can’t make the 10% needed to start saving for retirement, save as much as you can, and consider the 10% a goal. You typically have flexibility towards some of the goals, in terms of both dollar amounts and horizon. So use that flexibility as you think about how much to allocate to different goals.
Save More Tomorrow
Over time, your income, fixed expenses, or goals will change. So you may have opportunities to adjust later. As your pay increases, use that increase to increase your savings. The same with your bonus. Commit today to save a good part of it. These commitments both increase your savings and help you guard against developing bad spending habits, something financial planners call lifestyle creep.
Reboot Your Spending
You have heard it before, fasting or a diet cleanse can help you get started towards better eating habits. Similarly, try to reboot your spending. Make a commitment to cut your spending to zero for 30 days. Well, zero may not be possible, since you have utilities to pay and you need to eat and may have to drive your car to work. However, reduce any unnecessary spending to zero. That includes that premium subscription to Hulu services you never really use or can do without. Cut it. Empty your fridge and reduce your grocery spending on essentials and cook at home. It’s only for a month. You will find yourself with more money, more time to relax, better expectations about what’s essential, and improved self control. Check out this blog for guidance about a spending cleanse.
Track Your Spending and Make a Budget
Budgeting is something that everyone thinks they should do but never get to do. So first, yes you should do it. Budgeting creates awareness about where your money is going and whether you should be spending on something or not. Budgeting can help you focus on your goals and increase your chances of achieving them. And doing it does not have to be hard. Start with the 30 days, zero spending challenge above. Then track your spending for the next 30 days. Pick a simple notebook and a pen, and write down your expenses. Finally make your first budget or try YNAB, a great budgeting app.
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All this may sound like all work and no play. However, remember that you’re working towards goals that are really important to you. Every little accomplishment gets you closer to your goals. That’s why the first step is so important. Accomplishing many small steps in the right direction is how we achieve big things. Try out these suggestions, starting today!
Massi De Santis is an Austin, TX fee-only financial planner and founder of DESMO Wealth Advisors, LLC. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow, and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
