This post is part of our celebration of Financial Literacy Month this April.
We all know the importance of saving for retirement (and if you’re not convinced yet, this is a must read), but we also want to live a little! Have you always dreamed of taking a trip around the world? Utilizing automatic savings can help you make it a reality. I promise; it is possible. I’m living proof. My husband and I took a leave of absence from our jobs and traveled around the world for 8 months. (If you want a good laugh – and a throwback to what websites looked like in 2003 – check out www.travelcomedy.com.)
How did we do it? With automatic savings. After reviewing our budget to make sure it was possible, we had a fixed amount deducted from our checking account twice a month and automatically deposited into a money market account.
Here’s an example to illustrate how you can use automatic savings to help you reach your goal.
- In three years’ time you want to buy a Gold Apple watch. You need $5,000 to realize the watch of your dreams (which will hopefully be cheaper with future releases, but let’s stick with the original price for the moment). How do you put together a plan to make your dream a reality?
- Work backwards from your goal. $5,000 / 36 months = $138.88 per month. That’s how much you need to save monthly for three years in order to reach your goal (yes, I know, I’m taking the liberty of simplifying and not going into interest earned or the dreaded possibility of loss for that matter. It all depends on where you intend to invest it – more on that shortly).
- Let’s also assume you get paid semi-monthly (on the 15th and last day of every month). Why do I care when you get paid? Because the best time to trigger your automatic savings and have it deduct from your main checking account is immediately after your paycheck hits - then you won’t even have time to miss it! At that rate, you need to transfer $69.44 per paycheck into another savings vehicle in order to achieve your financial goal.
- Where should the money go? That is up to you (I’m definitely not qualified to give you advice) and a lot will depend on your risk tolerance and the length of time you’ve set to reach your goal. Jeremy and I started with tech mutual funds, but when the market crashed in 1999, so did our savings. We quickly realized that was not the investment vehicle for us. You have to figure out what makes the most sense for you.
These days, there is an app for everything! I don’t use them myself so I can't vouch for them, but a quick Google search quickly brings back numerous options like Smartypig, Acorns and Digit. Coming up a little short of your goal? Here are some tips for squeezing some extra savings out of your paycheck.
OK, let's do a quick review of how to get started on your automatic savings journey:
- Set goal
- Research total cost
- Determine timeframe
- Calculate per paycheck contributions
- Choose investment vehicle
- Set-up automatic deposits
I’d love to hear from folks that have already utilized this method or who are ready to try - what is your goal?
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