by Christopher E. Mediate
So, you’ve established your budget and you now have a strategy on how to maintain one (refer to my blog entry on budgeting if you haven’t yet already: mediatefinancial.com/how-to-create-a-budget/). This now puts you in a great position to start making that budget work for you – particularly when it comes to saving.
I know, I know… saving is far from fun and certainly isn’t attractive. And the majority of America agrees, as Bankrate’s 2023 Emergency Savings Report stated that “Nearly half (49 percent) of U.S. adults have less savings (39 percent) or no savings (10 percent) compared to a year ago.” There’s a variety of both external and internal factors that could be contributing to these statistics, especially with the current state of the world in mind. However, let’s spare ourselves from dissecting every cause and instead shift our focus to what you can be doing right now to become a better saver.
If you recall from my article on budgeting, we went in depth on the 20/50/30 Rule: where 20% of your after-tax paycheck goes toward your savings, 50% of it goes toward your needs, and 30% goes toward your wants. This framework not only allows us to systematically manage our budgets, but it also allows us to passively save toward our goals. But I want you to ask yourself something: Do you know what your financial goals are?
Setting Financial Goals
Think about any life goal you’ve ever set for yourself. It requires you to aim high, outline what you need, how you need to get it done, how you’ll track your progress, and when you want/need to achieve it. When it comes to setting financial goals, there isn’t a huge conceptual difference. When you identify what your true financial standing is, you can set much more realistic expectations for your financial goal setting.
There are a lot of different financial goals you can set, which might make it hard to figure out which ones are a priority, and which are not. Hence why one of the first things you’ll want to do is determine your short-term goals and your long-term goals.
Some may disagree, but I think figuring out what you want to save toward in the long-term is significantly easier than figuring out what you need to save toward in the short. I’d even argue that some long-term goals are already laid out for you. Take retirement for instance. Everyone wants to retire, and everyone wants to do so as early and as comfortably as possible. If you’re someone like me who’s early in their career, retirement couldn’t feel further. Because it’s so far out, I can definitely see how it can be put off by most young adults – yet it remains the most important savings goal you’ll ever have. The sooner you start saving for retirement, the better off you’ll be.
In contrast, short-term goals typically address more immediate needs or wants. In my last blog, I mentioned utilizing the 20/50/30 Rule to help repay debt or buy a new car. Those are both great examples of some short-term goals you can save toward. Or perhaps you have a summer trip you’d like to go on. That’s another common example and something easy to save toward passively.
Making Saving a Habit
So, we’ve addressed how to set financial goals and touched on some examples of each. But how do we shift into a money saving mindset to see these goals through? Luckily, following the 20/50/30 Rule solves a part of that equation. You see, the original iteration of the rule is actually the 50/30/20 Rule: 50% toward needs, 30% toward wants, and 20% toward savings. Notice that in our version, we flip the 20% from the back to the front. This is because we want everyone who follows it to get into the habit of essentially “paying themselves” first from their paycheck before they do anything else with it.
There are ways to make this easy. Everyone has different preferences so don’t take this as a recommendation, but the method I personally like is automating it through your bank so that the 20% is already deducted from your paycheck before you’re even notified that the check cleared. This way, it’s out of sight out of mind.
Now, let’s apply. Say you have a 401k retirement savings plan with your employer. You can go on your bank’s app (or however you’d like to reach them) and link your bank account to your plan. Then, you can set the desired percentage of your paycheck that you’d like to go toward that 401k plan. This way, with every paycheck you receive, you are passively saving toward your retirement with no manual effort necessary.
So that covers the long-term, but what if you’d like to save for that car? You can set up a separate savings account just for that car and use the same method above where you are passively contributing a percentage of your paycheck toward that goal.
Some other general ideas of good saving habits could be things such as taking advantage of deals/discounts and avoiding impulse spending (easier said than done, but that’s why we don’t ignore our wants when using the Rule).
Keeping Your Eyes on the Prize
Finally, when committing to being a better saver, you must stay motivated. Whenever you set life goals, one of the tips someone might give you is to have some kind of visual or symbol of the goal you’re working toward. I think this is a good tip to apply to your financial goals. For example, my dream vacation is a trip to Italy. If I were to set some savings aside for that, maybe I’d have some pictures printed out of the places I’d want to see and place them in my office or room to serve as a reminder that the saving will be worth it. Or if you’re a young person like me, maybe you’d make the place you want to visit most or the car you want to save for your lock screen on your smart phone. Really, it’s anything that can help keep your eyes on the prize whenever you’re tempted to break your good saving habits.
Even more important, don’t forget to celebrate your savings milestones! We rarely give ourselves near enough credit than we feel we deserve. Progress is progress, no matter how small. And remember, you don’t have to go through all of this alone. If you need help setting financial goals and staying on track, that’s precisely what financial professionals are here for.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.