How to Build Your Savings, Part 1: Setting Goals
As a consumer, building your savings regularly is essential. The biggest hurdle can be where to start. The first step is choosing your personal savings goals. Ask yourself these three questions:
- What are you saving for?
- How much do you need to achieve that specific goal?
- What is a reasonable amount of time to achieve that goal?
Here are Some Examples of Savings Goals:
According to the Federal Reserve, 46 percent of Americans do not have enough money saved to cover a $400 emergency. Because of this, many people resort to using credit cards to cover that emergency expense.
When saving for emergencies and other unexpected expenses, I suggest you:
- Aim for at least $1,000 in savings for emergencies.
- Build a savings account that equals at least six months’ worth of all household expenses, in case you experience a decrease/loss of income.
If you are on a tight budget, try to start saving at least $25 a month, then increase that amount as your budget permits.
2) Periodic Expenses
You know what your common monthly expenses are (rent/mortgage, food, electricity, insurance, etc.). But what about other items that come due every three months or once a year? This could include vehicle registration, Christmas or other gifts, school clothes, veterinary bills and vehicle maintenance, among others. It’s easy to let these expenses fall by the wayside until the bill blindsides you. Do the math and save ahead of time. For example, if your vehicle registration costs you $150/year, you should save $12.50/month into a separate savings account. Do this for other periodic expenses, too.
3) Major Purchases
Saving money for a down payment is essential to purchase a new car or a home. A 20% down payment is ideal, but you can still make the purchase if you set aside money that equals three to five percent of the purchase price. To buy a home costing $120,000, for example, you should save between $3,600-$6,000 toward down payment and closing costs. While it isn’t mandatory to put money down for auto loans, it is still recommended to aim for 20% of the car’s price. The more you put down, the lower your monthly payment will be.
4) The Fun Stuff
Want to go on that expensive cruise next summer? What about buying that 60-inch smart TV? Again, establish a time frame to achieve this goal, then decide how much you need to save each month. Let’s say you plan to take that cruise next year and it costs $4,500. If you have nine months to save, that means you’d have to save $500/month. If you have a year, it would be $375/month.
Are you having trouble finding “extra” money to save each month? We can help! Call LSS Financial Counseling at 888.577.2227 for your free, confidential financial counseling session or get started online. Our counselors will help you create a realistic budget and action plan to take control of your finances.
In “How to Build Your Savings, Part 2,” I’ll list a few techniques for reaching any savings goal you set.
Author Ray McCoy is a Certified Financial Counselor with LSS Financial Counseling.