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The importance of Creating Savings Goals

Saving money is crucial for financial security and achieving life goals. Having adequate savings provides a safety net for unexpected expenses and future needs. Setting clear savings goals helps prioritize where to allocate funds and track progress.

Understanding why to save and how much allows one to develop a realistic plan to build savings over time. With focused effort, individuals can gain greater control of their finances through purposeful savings.

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How to set up savings goals

1: Assess Current Finances

The first step in determining your savings goals is to take stock of your current financial situation. This involves reviewing your income, expenses, assets, debts, and overall net worth.

To get a full picture, gather the following documents:

  • Recent pay stubs to calculate your monthly take-home pay after taxes and deductions. Make note of any irregular income like bonuses or freelance work
  • Bank and credit card statements from the past 3 months. Review expenditures to understand your average monthly costs for necessities, discretionary spending, debt payments, etc.
  • List all assets like savings accounts, retirement accounts, home equity, investments, etc. Calculate their current value.
  • Make a list of outstanding debts like mortgages, student loans, car loans, credit cards. Note interest rates and minimum monthly payments.
  • Use a net worth calculator to subtract your liabilities from assets to determine your overall financial standing.

This financial review will provide crucial data to inform your savings goals moving forward. Track ongoing income and expenses as well to account for any changes over time.

2: Build up your Emergency Savings

We recommend having 3-6 months of living expenses set aside in an emergency fund. This money should be kept in a savings account that is easily accessible, so you can withdraw it quickly if an unexpected expense arises, such as a medical bill, car repair, or job loss.

Aim to build up your emergency fund over time by automatically transferring a portion of each paycheck into your emergency savings account. Once fully funded, continue making small contributions to keep pace with inflation.

3: Create Short-Term Goals

Short-term financial goals are things you want to accomplish within 1-5 years. Setting short-term goals helps you save and budget for major purchases and expenses coming up soon.

Common short-term goals include:

  • Vacation: The average domestic vacation costs $1,205 for an individual and $2,037 for a family per trip. Saving $100-200 per month can cover an annual vacation.
  • Vehicle: The average new car costs $48,000 while used cars average $28,000. Save 10-20% for a downpayment.
  • Downpayment: The median downpayment for first-time homebuyers is 6%. Save enough for a downpayment based on home prices in your area.

4: Create Long-Term Goals

Long-term goals typically focus on major life events that are 5-10+ years in the future. The most common long-term goals include saving for retirement, college, and buying a house.

Retirement is one of the biggest long-term goals for most people. Planning ahead for retirement ensures you have enough savings built up to maintain your standard of living when you stop working. We recommend saving 10-15% of your income annually to have adequate retirement savings.

Saving for your children’s college education is another common long-term goal. College costs have been rising steadily, so it’s important to start saving early through vehicles like 529 plans. Calculate projected costs at your child’s expected college and develop a savings plan to work towards that amount.

For many people, buying a house is a major long-term financial goal. Determine your target home price, down payment amount, and timeline to buy. Then calculate the amount you need to save each month to reach your down payment goal in time.

5: Prioritize Goals

When determining your savings goals, it’s important to prioritize them based on importance and timeframe. This helps ensure you are saving appropriately for short-term needs while also building funds for major long-term goals.

To prioritize, first list out all your financial goals and their costs. Then assign each a priority level – crucial, high, medium or low.

  • Crucial goals are non-negotiable items needed for basic living expenses and emergency savings.
  • High priority goals are important with a short 1-3 year timeframe, like saving for a house downpayment.
  • Medium priority goals are still desired but can wait 3-10 years, such as saving for college tuition. Low priority goals are nice-to-haves with longer 10+ year timeframes, like a dream vacation.

Next, rank your goals in order within each priority level based on target timeframes. Crucial short-term needs for basic living are #1. Then list high priority short-term goals, medium priority mid-term goals, followed by low priority long-term goals. This method ensures you are saving for immediate needs first while keeping longer goals on your radar.

Re-evaluate and adjust priority levels as needed over time based on changing needs and life circumstances. The key is balancing savings for short-term essentials and high priority goals with steady contributions over time for important long-term goals.

6: Make a Savings Plan

When making a savings plan, it’s important to first create a budget to determine how much money you can allocate to savings each month. You’ll need to track your income and expenses to see how much is left over that could go toward savings.

Next, set up a separate savings account to keep your savings goals separate from everyday spending. Having a dedicated account makes it easier to monitor progress and avoid tapping into savings for other expenses.

One of the most effective ways to build savings is to make contributions automatic through payroll deductions or bank transfers. Setting up recurring transfers on a schedule (weekly, bi-weekly, or monthly) takes the effort out of manually moving money. The automatic contributions will help the savings add up over time.

7: Track Your Progress

It’s important to regularly track your progress towards your savings goals. This allows you to see how you’re doing and make any necessary adjustments.

I recommend updating your budget and recalculating your goals at least every 3-6 months. As your life circumstances change, your financial priorities may shift as well. Revisiting your savings goals ensures they are still aligned with your needs and desires.

Use a spreadsheet, app, or online tool to track your actual savings versus your target amounts for each goal. Seeing your progress can provide motivation to keep going. If you find you are falling short, look for ways to increase your savings rate. This may involve cutting expenses or finding additional income sources.

Regularly tracking against your savings goals is key to staying focused and making steady progress. Don’t let too much time go by without reviewing your plan. Course correct as needed to keep yourself on track.

8: Adjust Savings Goals When Needed

It’s important to review your savings goals periodically and make adjustments if your situation changes. For example, if you get a raise at work or take on more expenses, you may need to re-evaluate your priorities and target amounts. Or if an unexpected expense comes up, you may need to pause or reduce savings for other goals temporarily.

Life changes such as marriage, children, job loss or health issues can all impact your financial situation. Revisiting your savings plan every 6-12 months allows you to account for these changes so you can stay on track. Don’t view adjustments as failures – they are simply part of the ongoing process of achieving your goals. The key is flexibility.

Disclosure: This post may contain affiliate links, meaning we receive a commission for purchases made through these links, at no cost to you.

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