Traditionally many of us spend January announcing lots of goals, resolutions, intentions, plans, whatever you want to call it, and then a majority of us fail at some or all of them within a few months. However, when it comes to financial goals, it literally pays to make every effort to stick to them.
You know — “save X (amount) for X (reason) by X (date).” Sounds easy, but putting it into play and being successful is the difficult part.
1) Determine what financial priorities you have — short-term and long-term. Get SMART with them — Specific, Measurable, Attainable, Relevant, and Time-Bound.
Whether it’s saving more or for a specific reason or paying off debt, list it out …
Example priorities:
I need to save $700 before the end of June for a new set of tires.
I want to max out my retirement/IRA plan contributions in 2022.
I want to pay off my student loan balance X (amount of time) earlier than it’s due to be paid off.
I want to be able to quit my job and work for myself with six months/a year’s current income set back / travel abroad for X amount of time with enough to cover travels + X amount set back to get restarted upon return.
I want to be debt-free before my __ birthday.
I want to fund a rainy day fund of X amount within the next year.
2) Now take that budget you’ve previously created and determine as of RIGHT NOW how much you are able to set aside into short-term savings, debt payoff, retirement accounts, etc.
Let’s hypothetically say that your take-home income (after taxes and all other regular deductions are taken out) is $30,000, which comes out to paychecks totaling $2,500 a month. Factor in recurring bills (i.e. rent/mortgage, utilities, base student loan payment, groceries, car payment (if you have one), gasoline, insurance, medical expenses (if you have them), & minimum balances on credit cards — although you should be paying more than that if not the entire balance each month!).
Whatever money is left over, determine the % you need to save towards each priority. Perhaps funding a short-term need (i.e. tires, dental work you need to have done, a car repair) ranks higher at the moment than saving to leave your job or funding a trip. Once that need is met, you can shift that % to something that needs to be funded next, like maxing out the retirement contribution for the year or increasing your rainy day fund balance.
Now, apply that info to the sample priorities above:
Saving $700 for a new set of tires is a fairly easily achievable short-term need priority even if one is living paycheck to paycheck because (most of the time) we can make adjustments to our budgets to eliminate splurge/excess spending or recalculate where you tend to go over budget in order to get the tires in the amount of time you have (for instance, in this case, six months from now).
[In a jam, we can also find other ways to come up with the money if the budget can’t budget any – picking up a side gig for a limited period to fund said necessity, selling items around our homes that we aren’t using much if at all, or even getting paid for plasma donations or cashing in recycling materials such as aluminum cans.]
To make it simpler, set up an auto-draft with your payroll department (if possible) to set a set amount into a special savings account you’ve set up for this purpose each pay period. That way you won’t see the money or have to worry about transferring it yourself before you forget and spend it on something else first. Once the tires are fully funded, you can leave the auto-draft in place to create a sinking fund for auto repairs, a down payment on a future vehicle, or you can repurpose the savings to fund another short-term need.
If you don’t have the option of auto-deposit – or don’t have a bank account, another option would be to use the envelope system to set aside all extra cash for the savings goal.
Maxing out a retirement contribution for the year might be a little harder to accomplish with the sample income (think the pre-tax salary amount that leaves you with $30k) unless you’re debt-free and have minimal bills/share expenses with someone. If your employer automatically withholds your retirement contribution for a pension plan, that’s great — it’s money you never ‘see’ or ‘touch’. Check with HR to see if you can feasibly increase the contribution amount each pay period without adversely affecting your ability to pay your bills with your take-home pay. Even if it’s only a few dollars from every paycheck, the power of compound interest will start working for you as you slowly increase your salary and future contributions.
Student loans. Let’s say that you’re aiming to pay them off in 5 to 10 years versus 10 to 20 years. Can you afford to double your payment every month?
For me, it was much easier to do than for many others since I only borrowed for two years in undergrad (sophomore and junior year) + the first semester of grad school — just over $10,000 total — and had a payment of $75 a month. I started out by paying the accumulated interest each quarter while still in undergrad and grad school so it wouldn’t be capitalized on top of the loan amount when it went into repayment. I then had the opportunity to consolidate all three individual loans when I was eligible a year prior to graduation from grad school to lock in the interest rate at 2.87%.
[I realize how lucky I was because those loans were in the 5-7% range at the time; while this low of consolidation/refinancing rates went away over the last couple of years, anything lower than your current rates if you’re not on a government repayment plan that leads to forgiveness is possibly worth considering!]
After getting a better-paying job once I graduated from grad school, when I could, I doubled or tripled the payment. When I couldn’t due to other bills or unexpected expenses (i.e. car repairs, dental bills), I paid the required amount that month. With my current job (that I’ve been at for well over a decade), I had/have two ‘extra paycheck’ months where I usually paid upwards of four to five times that minimum payment amount.
On top of that, one of my credit card rewards programs was linked in with Sallie Mae (at the time) and I managed to earn nearly $500 over a three-year period that was applied as I earned it to my loan payoff each quarter. That was 5% of my loan balance paid with credit card rewards**, not income from my paycheck! Clicking the confirm button on that final payment to Sallie Mae was a huge sigh of relief! Well … until it said I had a 12-cent balance that took two weeks to have removed!
**Note: I disagree with DR on this sticky topic — when a credit card is used the right way and you pay off your balance monthly, you’ll benefit greatly with the right rewards program(s), whether on a student loan balance, for travel expenses, or to use to buy holiday gifts.
Working for yourself or traveling for a while. It’s always a good idea to set aside at least six months or more of income when going into self-employment; I’d recommend twelve months of savings if it’s a field you’re not already established in as a side hustle or have been building up a business clientele in already. Having that much income set back guarantees you have money to cover your personal bills if you have a slow month or an emergency. Additionally, being debt-free (or having as little debt as possible) before making the leap into self-employment will reduce some financial stress when it’s a slow income month and you’re stressing just covering the bare minimum of rent, utilities, food, and transportation.
As for travel — if you’re paying as you go — price out transportation and accommodations, then add 10% more for inflation (especially as fuel prices tend to fluctuate as well all sadly know!). Budget food and entertainment in + extra for emergencies (medical treatment being one major thing). Then add at least 1-3 months’ worth of income to that total so you’ll have some fallback money to live on upon your return home while you’re seeking employment. If you are able to work abroad while you travel, it will alleviate some financial stress!
Becoming debt-free by a particular birthday. Let’s use 30 as the birthday in question & say that you’re 27 now. That gives you up to 3 years (depending on where in your 27th year you are) to get the debt paid off. Sit down and make a list of all the debt in your name (student loans, credit card balances, auto loans, etc). You can take a few different approaches to payoff — doubling to quadrupling payments as I did with my student loans or applying every spare penny you have each month split up across the board. Or you can apply either the snowball or avalanche method to your strategy if you have multiple debts.
Rainy day fund. This really should be a top priority if you don’t already have one. While a certain financial “professional” recommends only having $1,000 set aside if you’re in debt, I suggest having at least a month’s worth of expenses in savings even if you have a mountain of debt to pay off so that you have something to fall back on in the event of a true emergency (those shoes on sale at Macy’s or Nordstrom’s don’t count as a true emergency!). Once you’ve made headway on your debt repayments, start socking back whatever you can spare each month to continue funding this account to a much more cushy rainy day fund amount (three months to a year depending on your life circumstances).
With those examples, here’s how we put these tips into play over the last several years:
1) Saving $3,000 towards our vehicle maintenance fund. While I personally had $1,000 set aside for my car (to cover a set of tires + extra towards potential future repairs), we didn’t have anything set aside for my husband’s vehicles as he typically has cash flowed expenses. This changed in January 2021 — we focused on setting aside money towards a set of tires apiece for both his SUV and old truck + money towards repairs that his truck is in need of. Thanks to a refund check on an insurance policy, we were able to check this goal off in about six weeks of serious focus/cuts in spending.
2) Finish funding our emergency fund goal. We initially funneled money in the Spring of 2020 (including stimulus checks and a merit pay “bonus” I received) to get from a one-month EF to a three-month EF. After we paid off my husband’s SUV two and a half years early later that fall, we switched our gazelle intensity back to the EF, sending everything we had been sending to the SUV loan to savings, and finished our six-month EF in the spring of 2021. We’ve since had to use it for major home maintenance expenses and are working on rebuilding it back up as of this posting.
3) Increase investing in our brokerage accounts. Once our six-month emergency fund was completed in 2021, we began funneling a large portion of our snowball towards increasing our net worth and ever so slowly achieving FI (financial independence). We don’t have a set amount for this goal, but I hope to continue to increase the amount we send monthly as we are able to do so.
4) Save for home repairs/updates. We have some major projects we want to either DIY or hire out over the next several years. We’ve been slowly building up our sinking fund so that we are able to cash flow these projects as we’re ready to take them on.
