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Savings – The Importance of “Paying Yourself” First!

Posted on July 3, 2014

By: Geoff Stam, Director Default Management and Financial Literacy, Office of the Chancellor

Saving money is one of those items that is not difficult to say, but is usually harder to actually do. It usually involves more than just spending less money. How much do you want to save? How much do you need to save? Where should you put it? How do you keep in there? All are important questions to answer when it comes to starting the savings process. In our last discussion regarding budgeting, we discussed using your budget to create and execute your financial plan. As you move forward, one essential element to success with your financial plan will be to create savings. In this segment we will look at some of the basics of saving money to help achieve your financial goals.

1. What are your goals?

Saving money sounds great, but what are your goals for doing so? Just like when you put your budget together you need to have some goals in mind for savings, both short term (3 months – 1 year) and longer term (2 years – 5 years and beyond). In the short term it may be to have an emergency fund, or a vacation, or saving for Christmas. In the longer term it may be a vacation, a new vehicle, paying down your student loans or other debt, or retirement. Whatever your goals are, establish them, write them down and make them S.M.A.R.T. (Specific, Measurable, Achievable, Relevant, and Time Framed) goals.

Be specific your goals. Make them precise, for example “I want to save $1000 in an emergency fund,” or “I want to retire at age 65 with $1 million in investments.”
Make it measurable, so you can see the steps in the path to success. How much will it take you to get to your goal? “I will put $15 a week in a cookie jar,” is an example.

The goal must be achievable and realistic. You have to see and believe that you can accomplish your goal. Your initial goal may be to save $5 a week and eventually grow to $50 a week. Starting out at $200 a week may not be realistic. If you don’t believe the goal is achievable, you will not work towards being successful.

It has to be relevant to you and your idea of success. The goals have to be where you want to take yourself financially and what your needs are. Someone else’s goal may sound good, but is it what you want to accomplish financially?

Put a time frame around your goal which allows you to measure your steps to success. This also helps you to dictate your schedule for saving. How much do you need each week, month, or year to achieve the goals you have targeted?

2. Pay yourself first.

When your paycheck goes through payroll, before you actually receive it, your pay is already reduced by Federal Income taxes and FICA (Social Security and Medicare) deductions. You may have insurance deducted, and possibly some 401(k) savings (which is a good step to be discussed more another time). Once it goes into your bank account you then pay the housing, utilities, phone, groceries, gas, and so on. If you are not paying yourself even a small amount in savings, who is?

Make paying yourself a must pay expense and treat it as the first “bill” that must be paid in your budget. This may take some adjusting and discipline in the beginning. But even if it is only a small portion to start with, over time your savings will start to grow.

Use automatic transfer to make it easier to have that money move into savings. Even if it is only $5 a week, it makes starting the savings process easier. Just make sure you have it itemized in your budget and in your check register.

Other methods to help you save include collecting your loose change and using some form of piggy bank to get you started. Adjusting smaller expenses like reducing your coffee purchases by 1 or 2 days a week, or limiting the number of times you eat out for lunch. Reviewing your variable expenses regularly can help you find items that can be changed to create more savings. The amount you save is not nearly as important as starting the habit of saving. Once you have been in the habit for a while, you will find the amount you save has started to grow.

Just imagine, if you cut out a specialty coffee three times per week (average of $4) and put that money into a savings fund. That’s only about $12 per week, or about $52 a month, but over the course of a year that is about $624. If you continued putting that savings away regularly into a savings fund with a 6% annual return and monthly compounding, after 5 years you could have $3,628, after 10 years about $8,522, after 20 years around $24,026, and after 30 years close to $52,235. And that is just in “coffee savings!”

3. Create an emergency fund.

Most importantly, if you do not have one already, build an emergency fund to take care of the issues that life can throw us. Unexpected vehicle repairs, an illness, an injury, a plumbing issue, a leaky roof, or unemployment are all things that can happen that can create a major financial setback if you are not prepared. Think of your emergency fund as an insurance policy against things that can go wrong and should only be used when necessary for these types of items. It shouldn’t be thought of as a retirement fund or wealth building fund. There are other savings vehicles that will be discussed at another time designed to assist you in achieving those longer term goals. For now the aim is to make sure you can handle life’s unexpected, but necessary expenses.

If you do not have an emergency fund today, one of your immediate short term goals should be to create one. Start with a $250 to $500 target in this account in the next 3 to 6 months. Ideally having somewhere between $500 and $1000 in this savings in the next 12 to 18 months would be a great starting point. Once you have your base amount built up, you can work toward increasing this amount to cover your living expenses in the event of a job loss. Again, keep your goals S.M.A.R.T. within this process, but with the ultimate goal in mind of having 6 months of living expenses covered by your emergency fund. Why 6 months? Unfortunately the average length of a person being out of work today is around 27 weeks. This would keep you covered for your monthly expenses during that time.

Once your emergency fund is covered, it will then be time to look toward the longer term items such as a new vehicle, new home, or retirement. When starting to build more savings for the longer term items, there are many other options and vehicles that can be used. For now, the key is to start the savings process, regardless of the amount. Remember, it’s the habit that needs to be formed initially more so than exact amount. The end goal would be to have around 10% of your monthly income going directly towards savings. In our next article, we will look more closely at longer term goals for savings.

To summarize:

• Have (S.M.A.R.T.) goals, short and long term for your finances. Create your savings plan around those goals.
• Pay yourself first; make savings a must pay expense in your budget.
• Find adjustments you can make in your budget to create additional savings opportunities.
• Start building an emergency fund.
• Once the emergency fund is at 6 months of expenses, focus on the longer term savings items.

Please feel free to contact me if you have any questions or suggestions that have worked for you. If there is a specific topic you would like to hear about, please let me know. I am based at the Keiser University Jacksonville Campus and can be reached at (904) 296-3440 extension 139, or

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