Whether you are from the Baby Boomer, Gen X, or Millennial generations, you should have at least one or two personal financial goals. Managing your personal savings is the key to achieving those goals.
Here are seven steps you should take to manage your personal savings effectively:
Set Your Goals
Some popular goals to save for are:
- down payment on a house
- new car
- higher education
- major purchase (TV, large appliance or furniture)
If you are married or in a long term relationship, be sure to sit down with your spouse or significant other and ensure that you agree on your financial goals. Don't be confrontational. Try to reach the understanding that money is important to both of you, and work from there. It may take more than one session for the two of you to be in agreement. Be patient with each other and be willing to compromise.
If you're single, the path to setting your financial goals is much easier. Write a list of the things you want to save for. Then rank the list according to each item's importance to you. Pick the top one or two to set as your first financial goals.
In addition to the things you are "saving for", it is also important to set up an emergency fund. An emergency fund can give you peace of mind for those unexpected moments, like your car giving out, or losing your job. Most experts recommend that your emergency fund contain the equivalent of three to six months wages.
Use Financial Planning Tools
You can find all kinds of different financial planning calculators online. Here are just a few:
- The U.S. Department of Labor Lifetime Income Calculator - using your retirement age, retirement account balance, number of years to retirement and amount paid per month, this calculator lets you determine how long your retirement income will last.
- Planning on expanding your family? The U.S. Department of Agriculture's Cost of Raising a Child Calculator will help you estimate the costs of that added responsibility.
- There are also calculators available for college savings, mortgage or car loan calculations and much more. Type the name of your goal plus the word "calculator" into your favorite search engine and check out the results!
- If you like to do it yourself, you can find many templates available for your spreadsheet program that will help you calculate various costs.
Make a Timeline
Setting specific end dates for your goals will help you determine how much money you need to save. For example, if you want to buy a new, economy car next year, you have 12 months to save $18,000, or $1500 per month. If you decide to put half down and finance the other half, you would need to save $9,000 or $750 per month. Either way, mark the end date on a timeline and then mark the amount you need to save per month to reach the date for your goal. If $1500 per month sounds like a lot, break it down per week, or even per day. For example, $1500 per month is $375 per month or $53.57 per day.
If your goal will take more than a year to reach, you may want to set milestones. For instance, you could treat yourself to one of the products you gave up in the "Reduce Your Spending" section as a reward for reaching the halfway point of your goal. Rewarding yourself works for two reasons. First, if you deprive yourself of everything you enjoy, you could get tired of saving and eventually give up. Secondly, the less you treat yourself, the more you will appreciate it. As an unknown author once said, "The best way to appreciate something is to be without it for a while."
Keeping track of what you spend forces you to be honest with yourself about where your money is actually going. You may think you have a good idea of what your monthly expenses are, but are you sure? Tracking, as long as you track everything, tells the unmitigated truth. Here's how to start:
- Don't give up. The truth may be ugly, but facing your economic reality is the only way to know what needs to change.
- Keep receipts. Or take photos of them with your cell phone. Keep every single receipt for 30 days.
- Write down every expense in a small notebook that you can keep in your purse or pocket. There are also smartphone apps that can help you track your expenses.
Reduce Your Spending
Now figure out where you can reduce or eliminate expenses. Here are some suggestions:
Request a Credit Card Rate Reduction
If you have a large balance on your credit card and make your payments on time, you can ask for a rate reduction. Of course, if you are trying to reduce your expenses, not using your credit card at all is probably a wise choice.
Reduce Utility Costs
Turn down your water heater and install a programmable thermostat. Unplug devices you are not using and make good use of timers and power strips. You will be surprised at how quickly your savings will add up!
Do you really need cable plus Netflix, Amazon Prime and Hulu? Keep track of what programs you actually watch and eliminate the least used services. What about newspaper and magazine subscriptions? Are you really reading them? You could probably find a free source for your news online.
Buy Store Brands
Stores often carry "copycat" products under their own name. Check the ingredients list to make sure you are getting what you want. If the products are identical, you can save money over the name brand.
Start a Garden
Even if you only plant a few of your most commonly used herbs in some windowsill pots, think of how much money you will save over those little jars of dried herbs at the grocery store! As you gain confidence, you can plant a larger, more ecofriendly garden, and save even more.
Eat Out Less
Cooking at home more will save you money, and, as an added bonus, you will probably eat healthier. Learning to cook your own meals can also be a fun and fairly inexpensive hobby.
Set Up a Budget
Track your expenses, as mentioned above, for at least one month. Then group the expenses into categories. Some expense categories you might use are:
- Housing (rent or house payment, maintenance, etc.)
- Health care
- Credit Card
- Car (loan, gas, maintenance, etc.)
- Personal Care
Once you have decided how much money you should spend on each category each month, add your monthly income to determine your budget. In order to make sure you stick to the budget, you should record it on a spreadsheet. There are also many convenient options for budgeting software that are easy to learn.
An alternative way to budget is the percentage based budget. For example, as Senator Elizabeth Warren recommends in her Balanced Money Formula, you could budget 50% of your money for needs, 20% on savings, and the balance, or about 30% on wants.
One creative way to stay on a budget is the envelope system. In this system, you convert your monthly income to cash. Place the amount you have budgeted for each expense group in an envelope labelled for that group. Only spend for each expense from the money in the related envelope. At the end of the month, any money you have left over can be put into your savings account.
Open a Savings Account
You have set your personal financial goals. Why don't you have a savings account? Hiding your money in a pillowcase or burying it in a coffee can are not the best ways to keep your money safe. Here are some reasons why you should open a savings account:
No Minimum to Start
Most banks have a savings account you can start with very little money (sometimes as low as $25). Of course, if you keep a higher balance, you can avoid monthly service charges, too.
No Special Knowledge Required
Investing can be tricky. There is no special knowledge required to open a savings account. Why not keep your money safe and gain a little interest while you are learning how to better invest your money?
The Process is Easy
You can easily set it up so that a specific amount is transferred from your checking account directly to your savings account every month.
Your Money is Safe
Depending on the country, its government can guarantee up to $250,000 of the account holder’s money in their savings account.
Your Money is Accessible
Unlike other investments, you can access the money in your savings account whenever you like. However, if you want to make sure you don't spend your money unless absolutely necessary, you could also make it difficult to access, by setting up your savings account at a different bank.
No matter what point you are at in your life, setting a personal financial goal can help you get ahead. Managing your savings is the key to achieving that goal. By setting your goal, using financial planning tools, making a timeline, tracking expenses, reducing spending, setting up a budget and opening a savings account, you can help turn that goal into reality.