Goals are a necessary first step to achieving anything in life. Setting financial goals requires an understanding of your finances. You can use a retirement calculator to determine how much you need to retire, but the goal can’t be reached until you start saving. For that, you’ll need a plan. We suggest trying the one laid out here.
Step 1: Figure out your budget
Creating a budget is simple. Make a list of all your expenses. Include everything, even the seemingly inconsequential costs. Barring a raise or taking a second job, your income is finite. Every dollar you spend reduces the amount you’ll have left over to save. Figuring that out and internalizing it puts you in a position to create a savings plan.
Step 2: Eliminate non-essential expenses
Prioritizing expenses and eliminating non-essential frees up more money for savings and investments. You might even find a few extra dollars for recreation. Cut out items like expensive cable TV packages and phone plans. Try cooking at home instead of ordering takeout or going to restaurants. This step is all about establishing the right spending mindset.
Step 3: Pay cash for goods and services
Trimming your budget by eliminating non-essential expenses gives you more spending bandwidth. Use it wisely. Weigh each purchase carefully and pay cash instead of using your credit cards. Accumulating high-interest credit card debt can seriously dent your savings plans. Paying cash also tends to make you more thoughtful about what you buy.
Step 4: Create an emergency fund
Putting aside funds for the unexpected should take priority over other savings plans. Treating your emergency fund as an afterthought could prevent you from reaching your goals in other areas. Imagine saving for a major purchase elsewhere and having to draw from those funds for an unexpected car repair bill. An emergency fund would have covered that.
Step 5: Maximize your retirement savings
The mindset of waiting until later in life to “deal with” retirement could impoverish you in your golden years. The IRS allows you to contribute $22,500 a year to your 401(k). Put the maximum amount you can afford into it. You can also contribute an additional $6,500 to an IRA if you want to.
Step 6: Segregate your goal savings
Completing steps 1 through 5 on this list puts you in a position to comfortably save for other financial goals. Segregate those savings by opening a separate account or sub-account to let them accumulate. Don’t mix them with your emergency fund or retirement savings, and don’t spend them until you’ve reached your goal. Let the money earn you some interest.
Step 7: Review your budget and spending regularly
This plan is not a cure-all to solve all your financial problems. There will still be setbacks along the way. Income may change. Expenses may go up. Review your budget and savings plans regularly to avoid going too far off track. You may find that a few simple behavioral changes could solve your problems. Be objective and open-minded when you look at the numbers.
The Bottom Line
Saving is simpler when you have a budget. Develop a mindset where you continually look to cut expenses, pay cash for goods and services, and segregate savings into your emergency fund, retirement plans, and specific financial goal accounts. Review your budget and spending regularly, and you’ll give yourself the best possible chance of achieving your goals.