Let’s be honest, most of us all want something we don’t have at the moment. It could be a new house, a new car, a new job, a vacation, etc. And, while it’s been proven that “experiences” bring more memories than actual physical items, it doesn’t mean we still don’t want them.
Whether it’s wanting a new house, a second house, or a dream vacation, it takes money and time to get there. That means savings on your part. And, let’s face it, we’re not that good at saving money. Most of us specialize in spending money – and we’re quite good at it.
Well, today, I’m going to show you the right way to go about saving for that next big purchase and what you need to do in order to get there. Yeah, it’s probably not the sexiest thing in the world to discuss, but with a little planning and a little time, you might just get that Ferrari you’ve always dreamed of – or rather Tesla in this day and age.
Whatever your big purchase is, I’m going to show how to get it. Plus, with automation and new technology today, saving hasn’t been easier. I know, we all want things right here and right now, but saving for that second home or dream vacation just takes a little time. And, guess what, the wait and anticipation leading up to it can also be pretty exciting. So, let’s get started.
What is your Goal?
Now, you’re probably thinking to yourself, why in the world is this one of the steps in the process. A great question, but let me explain.
We all have goals and dreams in our minds – and, that’s only where they exist, in our mind. Yeah, we might tell our spouse or our friends, but that’s really about it. The key is actually writing those goals down.
If you write down what that big purchase is you’re saving for, then you will certainly be the exception – and, already one step closer to achieving it. By writing something down rather than keeping it in your thoughts, you’re actually making a commitment.
Okay, so take a minute to write down or type up what it is you want to purchase. Once you’ve done that, put it somewhere you’re going to see every single day. It could be on a computer screen, your nightstand or, heck, I’ve even heard of people keeping it in the shower. Regardless of where, just do it.
This will be the constant nagging reminder you need in order to follow through. However, you can’t stop there; you also need to write down your concrete plan on how you’re going to save that money – which, just so happens to be the next section.
Create a Plan
Once you know what you want to save for, it’s now a matter of creating a plan to get there. Let’s look at an example, so it’s easier to see.
Say I wanted to save $50,000 for the purchase of a vacation home and I’m starting from scratch. Certainly a bit overwhelming to even think about when you have zero, but once we lay out a plan, you’ll see there’s actually hope.
Next up, you need a time frame. Your time frame is based on when your last child graduates from college and is no longer on your payroll, which would be five years. So, in 5 years, you want to have 50k saved.
Now, we go into our fancy savings calculator provided by Bankrate. Before I share the results, I’m going to quickly go over interest. Since this is a short-term goal, I would recommend saving this money in a savings account so that you know it’s going to be there in five years. If it were a long-term goal (> 5 years), you might be able to take a little more risk. The savings account I recommend to clients is the Goldman Sachs Online Savings account. It’s currently yielding 1.3%, so that’s the rate we’ll use.
Once we get it all plugged in, we would need to save $838.43 per month or $192.95 per week or $27.56 per day. Okay, now, we know what we need, we now need to figure out how to get there.
Start with the budget to see what your surplus is on a monthly basis. Right now, you have about $400 you can put towards that goal. Awesome, we’re almost halfway there. Now, it’s time to see what you can cut out of your budget on a monthly basis (while still having a life) so you can achieve your goal. After working the numbers, you can trim $200 a month from various expenses (eating out, coffees, etc.). Great, we’re now at $600 a month.
However, you also get a bonus every year that’s around $4,000 that you could put towards it. If that’s the case, then you’re going to be there in less than five years. Let me stop here for a second and explain.
I think you get the point I’m trying to make. Many of us have money we could be saving every month; it’s just we don’t work very hard trying to find it. That’s what I’m trying to do here. Find gaps in your budget and in your spending where you could actually be saving that money.
Money needs to be saved at the beginning of every month, rather than the end. This is where most of us go wrong. We save what’s leftover rather than what’s already there when we first get paid. Your savings goal should be treated as a fixed expense just as a car or cell phone payment. Plus, with today’s automation technology or other savings software, it makes it easier than ever, and you’ll be able to find even more places where you can save – and, what do you know, that just happens to be our next section.
As the Nike saying goes, “Just Do It.” The first thing I suggest is automating your savings as much as possible. If we take the example above of saving $600 per month and I get paid off the 1st and 15th, then I would set up automatic withdrawals to my Goldman Sachs account (linked to my checking account) of $300 on the 2nd and 16th. Automation is the key to saving for any reason.
There are also plenty of other apps and software that will help you find additional savings. One that I recommend and have been testing over the last few months is Acorns (learn more about it in Five Financial Apps That Will Make Your Life More Efficient).
Basically, it links to your checking account and credit card and rounds up all of your purchases to a savings account. You can also set up automated recurring savings amounts as well. I have mine set up for 2X roundups (meaning it doubles my roundups) and I’ve averaged about an extra $150-$200 a month in savings. It’s super easy, you never even notice, and you’ll be pretty amazed at how fast it adds up.
Another one that’s pretty cool is called Digit. Again, it connects to your checking account, analyzes your income and spending, and then finds the money it can set aside for you in a savings account. It’s a great concept and just another way to put more money away for that next big purchase. I’ve personally never used Digit, but it comes highly recommended by many and has tons of great reviews.
Again, you’ll be amazed at how much you can really save on a monthly basis if you just make the effort. And, with new apps and software making it easier than ever, you’ll be amazed at how fast you’ll get to that next big purchase. Best of luck and happy saving!