You realize that you have been working for years and have not accumulated any significant savings. You are now at the point where you decide that you want to set some money aside for a rainy day or a major purchase. If you have a specific goal in mind, you probably know how much money it will take to accomplish that goal. But before you start saving, here are some things to keep in mind.
Ideally, you should come up with a list of financial objectives to determine how much you should save to meet your goals. For example, you may want to purchase a new car, save for a home, or put money away for your children’s education. Before you can determine how much to save to meet your goal, you need to prioritize your goals. There are some basic rules regarding how much you should save depending on certain life circumstances.
Where do I start?
Before you jump into saving for those specific goals, you should start with emergency savings. Emergency savings is for those unexpected expenses, you know like that unexpected car repair or leaky roof. Those expenses that you never see coming and could wipe you out financially if you are not prepared. As a general rule of thumb, you should have money set aside for at least 6 months of expenses if you are single with one income stream. For a two income household, at least three months of expenses is recommended.
Once an adequate emergency savings is established, you can consider saving for other goals. You will need to determine what’s most important to you to prioritize your savings. When you identify your goals and the order of importance, this will help you to decide how much you should be saving. In addition, the amount and deadline of the goal will also be a factor in how much you should be saving. So if you know you want to purchase a car in a year that cost $12,000, you will have to save $1,000 per month. This could possibly be an aggressive goal depending on your cash flow situation which brings me to my next point. You should set realistic goals. To do that, you need to look at your discretionary income to determine what you can set aside to meet your financial goal.
Accumulating savings takes dedication and discipline. If you are a person that has compulsive spending habits, you need to be more strategic. The best way to ensure that you meet your savings goal is to establish a systematic savings plan. An example is saving in an employer sponsored retirement plan. Before you ever see the money, it comes directly from your paycheck and is deposited into your retirement account. You can do this with savings accounts at your bank as well. Consider allocating a portion of your paycheck to go directly to your savings account or setting up an automatic sweep from your checking to your savings account. Once your savings is on auto pilot, you will see the cash stacking up in no time!
