Step 1-How Much to Save and for What

You already know saving for emergencies and short-term goals should play a critical role in your household finances. Sometimes, though, knowing something does not equate to doing something.

The following hacks can both simplify the savings process and increase your chances of successfully reaching your savings goals:

  1. Calculate what you need
  2. Allocate how much you need to save for each goal from each paycheck
  3. Separate your savings into multiple accounts
  4. Automate your savings deposits
  5. Communicate your savings activities and goals with other adults in the household
  6. Celebrate your savings achievements

1. Calculate What You Need

You need to know how much you should be saving. To know that, you need to understand what you are saving for.

You can easily determine how much you need for short-term goals like vacations and birthday gifts. However, deciding how much to save for emergencies gets a bit tricky. You don’t know when and how extensive the emergency will be. In general, you want enough money in your emergency savings to replace your income in case you find yourself without income (due to unemployment or an accident) for several months. Use the following formula to get a more practical savings goal than the 3-6 months often recommended in the media.

  1. Add up and write down your monthly living expenses, including housing, food, necessary clothing, required transportation, and a phone plan.
  2. Divide your estimated annual income by $20,000. Example: $70,000 ÷ $20,000 = 3.5
  3. Multiply your monthly living expenses from line one by the result of line 2. This is your target emergency savings fund amount.

If your monthly living expenses add up to $3,800 (step 1) and your annual income is $70,000 (step 3 results in 3.5), then you multiply $3,800 by 3.5 to come up with a target emergency savings goal of $13,300.

2. Allocate

Besides your emergency funds, you should plan to save for various short-term goals.

  • Make sure you have identified which goals you want to save for. Examples might include emergencies, your next vehicle, a vacation, appliance and furniture replacements, landscaping, etc.
  • Determine how much money you need to earmark from each paycheck to go to each goal. Use the savings goal HERE to set your monthly saving amounts for each goal.
  • Place a portion of each paycheck or other income into each savings account. The following Savings Pie provides an example:

3. Separate

Many households add money to savings every month but transfer it back to their checking mid-pay period because they need it for impulse purchases, splurges, or unexpected bills. If you have ever found yourself in such situations, consider the following ideas for this hack:

  • Keep your savings funds in accounts that are separate from your checking (spending) account.
  • Move your savings funds to a savings account in a separate bank or credit union to minimize the temptation to transfer your savings funds back to checking between paychecks.

If your goal was to stop eating junk food, would you keep a pile of it on the kitchen table? Of course not. Move your savings away from your spending account.

4. Automate

The most powerful of all our hacks, this suggestion can put your savings on autopilot so you can stop stressing about how much to save and, even more importantly, stop trying to make the decision to save every month. Make the decision once, and then let automation do the rest. Here are three options to consider. Match your situation to the one that will seem to work best for you:

  • Option 1: Set up a direct deposit from your employer into your emergency savings account
  • Option 2: Set up an automatic transfer from your checking account to your savings account
  • Option 3: Set up an automatic bill pay from your checking account to your savings account at a separate financial institution

5. Communicate

Sharing your savings commitment and goals with others can help in several ways. First, if there is another adult involved in your finances (spouse, partner, etc.), consider the following hack:

  1. Set up a 15-minute weekly “financial huddle” with the other adult.
  2. Balance your spending/checking account before the meeting.
  3. Review your mutually agreed-upon savings goals to begin the meeting.
  4. Note the current balance in your spending/checking account.
  5. Identify all upcoming bills and expenses between now and the next paycheck.
  6. Decide who will pay each bill or expense and how (online, app, cash, etc.).
  7. Discuss how to save more money to put toward your goals.

The next hack, as simple as it sounds, has been proven to increase your chances of success for achieving goals by nearly 80% over simply identifying your goals:

  • Find a friend, family member, or mentor to share your savings goals with.
  • Report your savings progress to this confidant weekly by phone, in person, by text, or via email.

6. Celebrate

To find a little extra motivation to save, consider celebrating your successes. Here are a few ideas to help:

  • Identify savings milestones that you want to reach and can celebrate. For example, when getting started, set a $500 or $1,000 milestone goal.
  • Incorporate a small amount of “fun money” into your savings to celebrate when you reach your savings goals. For example, celebrations might include a movie or dinner out for smaller goals or a staycation for larger goals. If dinner out costs $50, set a goal to reach $550 and then celebrate with a dinner out once you’ve hit $550.
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