The Savings Process
Saving money can be a daunting process. With competing priorities and limited time it can also feel extremely overwhelming. You may be asking yourself the following questions: Where do I start? What should I save for? How much should I save?
The best place to start is by setting clear goals. Goals should have a clear objective and be measurable. For example, a goal could be that you want to save for a $10,000 emergency fund over 1 year time frame.
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How I prioritize saving
I like to think of saving as a micro goal and investing as a macro goal. Both are important but executed differently. Saving money should be associated with a specific need (emergency fund, saving for a home, saving for college, etc.). Investing allows you to build wealth and earn passive income. This is a very important differentiator between saving and investing. Unless you are sitting on a huge pile of cash, you will never build wealth or earn large amounts of passive income by simply saving money.
What savings goals take priority?
What are your goals for the next 5 to 10 years? Do you want to travel, buy a home, have a family, or go back to school? The one thing all of these have in common is that they all cost money! So the question is how are you going to afford them? When you have these types of goals it is important to work backwards. Know what you want, then pave the path on how you are going to get it. Make a list of your goals and rank them. Take the top five items from the list and calculate the cost for each goal. From hear you have your goal number. Now you know how much you need. Now you just need to know where to put it.
Where do I hold my savings?
Where you hold your funds will vary depending on your end goal. If it is a goal that you hope to achieve in the short-term you will want to preserve your capital and not put it in asset that is volatile like the stock market. There are lots of short-term savings options to choose from. You could put your funds in a high-yield savings account, bonds, or a money market account. Choose what is best for your personal situation.
How much is enough when saving?
While saving money is a crucial part of money management it is important to save in moderation. Saving vehicles typically provide a lower return than investments because the risk is much lower. Having too much in savings can be a huge opportunity cost in the long run. It is important to balance risk and opportunity to earn a higher return elsewhere when making your savings plan.
Also, it is also important to keep in mind the time value of money. A dollar now is worth more than a dollar a year from now. How many dollars are worth putting aside in savings for clear and specific needs? Below are the 5 things that I actively save for. Anything outside of these parameters for me is too much to hold in cash.
- Emergency fund (6 – 9 months of expenses)
- Down payment for my next car
- Vacations
- Home maintenance and furniture
- Opportunity fund
Emergency Fund – I have an emergency fund that covers all of my basic needs for 6 – 9 months.
Down payment for my next car – My car is getting up there in age and I need to at least have a plan if it goes on the blink anytime soon. For this reason I have money set aside for a down payment for another car. If I buy used it may be enough to buy one in full. It really just depends.
Since needing another car in the future is not unexpected or a surprise, it is something I consider a savings goal that I actively allocate money towards every month. I don’t put a huge amount aside for this expense because I want to put my money into things that are appreciating and not depreciating (like a car). My main objective is to have enough set aside so that I have a small car payment if I have a car payment at all to keep my monthly expenses down.
Vacations – I’m not doing this right now due to COVID but I do have funds set aside for when things go back to normal. I am a strong believer in paying for lived experiences with cash and not credit. For that reason, I save for every aspect of the trip beforehand. I use a credit card to get the points, and then pay it off that month.
Home maintenance and furniture – If you own your home it is important to have funds set aside for maintenance and repairs. Similar to vacations, anything new that I purchase for my home I want to be able to buy in cash. If I can’t afford it I either don’t need it right now or I need to find a cheaper alternative.
Opportunity fund – My opportunity fund is the cash that I have outside of my investments for potential opportunities. This could be an investing opportunity or a personal opportunity. Examples of an investment opportunity could be buying stocks on sale when the market drops or investing in a new business opportunity. Based on the goals that I have set for myself that year I determine what amount makes sense to allocate to this purpose every month.
Some might find this allocation as too much to hold in cash while others may see it as conservative. It all depends on your goals and situation.
How to manage ongoing savings goals
Do you ever struggle with staying consistent with your savings goals? Digit is a tool that automates your savings goals. All you have to do is set your savings goals in the app and Digit handle the rest. Whether you’re saving for a vacation, an emergency fund, or paying off debt Digit can automate all of it! Their algorithm looks at your spending to determine how much money you can save.
You can create goals in Digit to let them know how much you want to save over a specific period of time. For example, if you want set a goal to save $1,000 for holiday shopping over the course of a 6 months you can put that into Digit. Digit will then take money out of the account you link to it incrementally based on what you have available. Digit also provides automatic text messages to alert you of what it’s doing.
For just $5 a month you get the following:
- Automatic Saving
- Unlimited Goals
- Pay off Credit Card – Digit will save for and pay off credit card debt
- 0.5% Savings Bonus – Get paid for saving every three months
- Unlimited Withdraws
- Overdraft Reimbursem*nt – If Digit saves too much they cover overdraft costs
With Digit you can set clear savings goals then put it on autopilot!
Final Thoughts
Ultimately, these are all great ways to stay on top of your savings goals and continue to stay motivated. Remember that saving money takes time. Don’t feel discouraged if you have ambitious goals that may take months or years to save for. Have realistic expectations for yourself, automate the process, and watch your savings account grow! What savings goals are you currently working on?
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit theDisclaimer Page.
