Setting clear, specific savings goals is one of the best ways to achieve your financial objectives, but it’s a task many people struggle with. Unfortunately, establishing savings goals is a bit more complex than simply choosing a random number and hoping you can eventually set aside that much cash. Below is a simple, seven-step plan that you can use to set — and reach — your savings goals.
1. Select Goals
Before you start saving, it helps to know what you are saving for, since most of us find it easier to save money if we know it will eventually be used for a specific purpose. Common savings goals are creating an emergency fund with at least six months of living expenses or saving for retirement, a child’s college education, a down payment, or a vacation. Your goals will be as unique as you are; the most important thing is that you select them and make them as specific as possible.
2. Determine How Much You Need to Save
Exactly how much money do you need to accomplish your goal? For example, you may want to have $5,000 saved for your dream vacation, $30,000 for a down payment on your first home, or $1 million for retirement. Don’t just choose a random number at this point — research how much you’ll need, so that you can be confident that your savings will be sufficient to get you to where you want to be.
3. Consider Your Timeline
Savings goals can generally be divided into three broad categories: short-term (those you hope to reach in a year or less), mid-term (those that are roughly one to five years away), and long-term (goals you hope to achieve in five years or more). It’s important to know your timeline, since it will have a direct impact on how aggressively you need to save and where to put your money to hit that target.
4. Determine How Much to Set Aside Each Week or Month
For short-term goals, this step is simple. Say you plan to get married in a year, and you want to have $10,000 saved toward that goal before your big day. To meet that goal, you’ll need to save roughly $833 per month for the next year, or $10,000 divided by 12. Determining how much you need to save to reach your long- and mid-term goals can be a bit more complicated, as you’ll need to consider the growth of your investments. There are online calculators you can use to estimate how much you’ll need to save every month if you want to have $1 million for retirement by the time you retire at 65, or $30,000 for a down payment in three years.
Whatever the time frame for your goals, making these calculations is important, because it allows you to adjust your savings as your budget allows. For example, if you can’t afford to save the over $800 a month you need for the wedding, you have two options: You can either adjust your timeline or opt to keep it the same and save less.
5. Automate Your Savings If Possible
Once you know how much you need to save, you’ll likely find it easier to stick to your plan if you can automate your savings. Adopt the pay-yourself-first principle and set up automatic transfers to your savings or investment accounts. The key is to save the money before you ever have a chance to spend it, as well as to avoid forgetting to make the transfers.
6. Choose the Right Way to Save
Depending on your goal and timeline, you have different options for savings. Traditional savings accounts are a good option for short term goals, since your money will be safe; while investment accounts and retirement accounts, like a 401(k) plan or IRA, are good options for longer-term goals, since you’ll earn money as you save.
7. Watch Your Money Grow
Once you have your savings plan in place, keep an eye on how it is doing. You will need to periodically review your results and make adjustments as necessary.