The short film Pay Day is a financial fairy tale about a fun-loving woman who focuses only on the now without considering the consequences. She suddenly finds herself caught in a time loop—reliving the same pay day over and over—until she learns to make better choices, plan for her dreams and save for the future.
But you don’t need to get caught in a time loop to learn to be a better saver. There’s an essential formula for saving money: Envision what you are saving for, make a plan and then execute that plan.
More expensive dreams obviously take longer to reach and often require a more complex plan, but the formula is basically the same. Start with a vision of what you want to save for, then calculate and plan how you will save and finally save. Here’s how it works.
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Step 1: Choose your dream and set your savings goal
Maybe you want a new car, a vacation or a down payment for your first home. Whatever your dream is, be clear about what it is you’re saving for. If you have more than one goal, prioritize each of them and make a list.
You can save for more than one dream at a time, but have distinct saving goals for each. You may want to set up separate accounts, with different timelines. Remember that goals on different timelines can run parallel, allowing you to put away money for your retirement, for example, while also saving for next year’s vacation.
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Step 2: Calculate how much you need (and are willing) to save
Make your goal more easily attainable by calculating what you’ll need to save, and then figure out how you’ll do it.
To create a savings budget, begin by tracking your income and expenses for a month or two. You can go back and look at your receipts from the last few months, or start from today. Once you know your typical monthly expenses, place each of them in either of two categories: wants and needs.
● Your needs are things like food, rent or mortgage, transportation, utilities and healthcare.
● The wants are less essential, but are the fun parts of your life, such as dining out, entertainment or leisure activities, a gym membership, hobbies or travel.
To free up money to save, be ready to make a conscious decision not to spend on certain wants, and instead, funnel that money into your savings. You don’t need to give up all your wants but decide which ones you could cut back on in order to save.
You will likely have some trade-off decisions to make. For example, saving for a down payment on a house will require a major commitment. It might take a few years of conscious cutting back on nonessential expenses. What trade-offs could you make?
❏ Dining out once a week instead of twice a week.
❏ Taking public transportation to work to save on parking and gas.
❏ Swapping out movie dates with free or low-cost entertainment.
❏ Switching to a cheaper phone plan.
❏ Cutting your cable TV costs or canceling underused subscriptions.
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Step 3: Pick your strategies
How can you save most effectively?
● Send automatic deposits from your paycheck into a savings or investment account. It is one of the easiest, most effective ways to save. It saves time, and removes some of the temptation to spend.
● Follow a balanced money formula, such as 50-30-20. This formula recommends spending no more than 50% on needs and 30% on wants, and saving the remaining 20%. If your needs or wants take up too high a percentage, you should consider cutting them.
● Use the 24-hour rule. Instead of making impulse purchases, wait 24 hours before you buy any big-ticket items so that you can reflect on the purchase.
● Save your windfalls. If you receive a bonus, a gift, a tax refund or a small inheritance, save it instead of spending it.
● Ramp up your savings rate. For a multiyear savings goal, you could commit to increasing your savings rate by 1% each year. Let’s say you’re aiming to buy a house and hope to save enough for a down payment in five years. If you earn $50,000 a year and save 10% of your income, or $5,000, in year one, increase that by 1% or $500 in year two for $5,500. Continue to save $500 more a year with each successive year: saving $6,000, $6,500 and $7,000 in years three, four and five, respectively. Add up the totals and you’ll have $30,000 saved, rather than the original $25,000.
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Step 4: Stay focused
The biggest challenge with a big multiyear savings goal can be sticking with it. There will always be temptations to spend money. Here are ways to stay focused:
● Remember your “why.” Why are you saving for this goal? For a visual reminder and a way to reinforce your thinking, keep a photo handy of your dream house, dream car or dream vacation.
● Break it down. Large goals, such as a $25,000 down payment for a house, might seem daunting. Encourage yourself by celebrating your progress with savings milestones (e.g., every $5,000) along the way.
● Visualize your progress. Make a chart of your savings, the way community fundraisers do, and update your chart as you move toward your goal.
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Step 5: Re-evaluate your dream before you buy
Once you’ve reached your savings goal, it’s a great time to re-evaluate your initial dream. Have your goals or priorities changed at all since you began your savings journey? Has the cost of the item you’re saving for changed? Before actually spending the money that you’ve saved, reflect on whether you still want to make the purchase.
With this straightforward approach, you can achieve your dreams and enjoy the fruits of the discipline, planning, focus and effort.
Allan Kunigis is a financial freelance writer based in Shelburne, VT. He has written about personal finance for more than two decades.
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