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SET Simple Earnings Targets to Boost Your Savings

Save Specifically to Achieve Financial Freedom


Ask 10 financial advisors how much money to save and you will get at least 10 different answers:

  1. Six months of living expenses

  2. $1000 emergency fund

  3. A rainy day

  4. $1 million in your IRA

  5. One year of income

  6. Down payments

  7. 10 times your monthly budget

  8. Whole life insurance premiums

  9. Enough to buy the next house in cash

  10. More than your parents did

 

Actually, the question is misleading. It’s not about how much money you save. You really need to ask yourself two questions:

  1. What is the PURPOSE for saving the money? What are you going to use the money for?

  2. How much TIME do you have to save the money? When will you need to use the money?



Saved money prepares us for life’s financial challenges. It gives us flexibility to make life decisions we wouldn’t be able to make otherwise. That is financial freedom.

 

The PURPOSE question helps us prioritize our savings targets. Here are 10 important, purposeful savings targets:

  1. Checking account breathing room – Put one month of budget in your checking account, draw a line, and try to stay above that line with your budget and cash flow.

  2. Unexpected major expenses – Car repairs, home repairs, medical bills, etc. Save ahead of time for things that cost less than $3,000 that end up on our credit cards at 25% interest.

  3. Job loss – On average it takes 3-6 months to find a new job, and even longer to find one at your current salary, so have 3-6 months of living budget in savings.

  4. Vehicles – Paying cash for an economical vehicle that lasts 10 years is better than a 5-7 year loan with interest on a vehicle that will be worth as much as 75% less than what you paid when it’s time for the next vehicle.

  5. Home mortgage down payments – Put down at least 20% of the home value to avoid mortgage insurance and other fees. Ideally you want to get to more than 50% down to have more home equity than loan, which helps ensure you are not underwater if you have to unexpectedly sell the home and pay off the mortgage.

  6. Health insurance deductible – You can pay less in monthly health insurance rates if you save for a high deductible and stay healthy. If your employer offers a Health Savings Account that does NOT disappear at the end of the year, take advantage of it for income tax-free savings.

  7. Vacations, Travels and Holidays – Plan ahead for these things that are going to happen every year, get ahead of the curve and save ahead of time so that you don’t pay credit card interest on intangible debts with no resale value.

  8. College – If you want to help your children with their college tuitions, start saving and investing early rather than taking loans at exorbitant interest rates and tight repayment plans. Use an education 529 account for tax-free investment income.

  9. Disability – This flies under the radar the most often; losing the ability to work for 6 months to 2 years, due to physical injury (sports, surgery, vehicle accidents, natural disasters, etc.) or illness (cancer, multiple sclerosis, Lyme disease, long-term covid, etc.). Make sure you have disability insurance and work on growing 2 years of income in a “bridge” taxable investment account.

  10. Retirement – Thanks to higher inflation and real estate costs, $1.5 million is now the “magic number” for a comfortable retirement from full-time work, assuming you will live on the average 10% earnings ($150,000) every year, without factoring in Social Security, pensions, life insurance, inheritance, or other means.

 

The TIME question determines your urgency to save. It’s difficult to save your entire paycheck. So you’re going to have to decide how important the target is and how much time you have. This is why it’s much easier to save when you are young. Couples without children can live on one income paycheck and save one income paycheck. If you’re in your late 20s you can invest that money for 30-35 years to work for you, rather than if you’re in your late 50s and trying to retire in 5-10 years. Resist that urge to use up both incomes on your monthly living budget. Live on one income and save the other income.

 

The most simple savings plan is the one you can achieve. To keep it achievable, be SMART (Simple, Measurable, Achievable, Relevant, Timely). The PURPOSE is the Relevant. The TIME is the Timely. Now to be Measurable, set milestones to achieve. For example:

 

  • Save 6 months of ideal living expenses ($30,000) in 2 years by putting $1,250 per month in a money market account making 5% interest.

  • Save for a 10th Anniversary trip for two weeks in the Caribbean (or wherever) at $8,000 by putting $500 per month in a money market account for 15 months.

 

To make these goals Achievable, celebrate the milestones along the way. Let’s SET milestones for our two SMART savings goals.

 

Save 6 months of ideal living expenses ($30,000) in 2 years by putting $1,250 per month in a money market account making 5% interest.

  • Emergency Fund $2,500 – 2 months

  • One Month Survival $5,000 – 4 months

  • Three Months Breathing Room $15,000 – 10 months

  • Six Months Survival $22,500 – 18 months

  • Six Months Ideal $30,000 – 22 months (interest should help)

 

Save for our 10th Anniversary trip for two weeks in the Caribbean (or wherever) at $8,000 by putting $500 per month in a money market account for 15 months.

  • Airfare $2000 – 4 months

  • Airfare plus Hotel $4000 – 8 months

  • Airfare, Hotel and Food $6000 – 12 months

  • Airfare, Hotel, Food and Fun $8000 – 15 months

 

The trick? Making the savings payments to yourself more important than payments to the bank. You can only touch savings in an emergency. Even then, if an unexpected expense comes up, and you can pay that off at no interest, set up that payment plan from your budget. Try to keep your savings money going to those savings accounts. Create multiple savings accounts at the same bank, or use different banks. Have the money automatically pulled from your checking account into the savings account every month as soon as you receive your paycheck.

 

What happens if a life emergency comes up and you can’t make the savings goal? Re-SET the goal and the milestones! Don’t give up, adjust for life. Even if you don’t achieve the ultimate savings goal, if you achieve a milestone or two it’s better than nothing.

 

But you can’t save if you live beyond your means. Live on one, save one! If you’re married and need help to SET your savings plans, book a Discovery Call to find out if personal finance coaching would be right for you. You can do this – together!

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