Having savings goals is an essential part of your financial plan. And avoiding consumer debt is essential for your financial peace of mind.
What’s better than being able to afford something you want without going into debt? It takes a bit of planning, but it doesn’t have to be complicated.
Heck, the easier you make it, the more likely you are to do it.
Unlike most goals in life, you can get instant and clear feedback on how you’re doing.
Okay, I’ll admit math is required, but I promise you, it’s easy math.
A quick note: although it’s an important goal, we aren’t talking about saving for retirement or financial independence here. That’s a goal that takes most people decades to reach, and here we’re talking about 10-years-or-less goals.
That being said, let’s jump in.
1. Decide What You Want
First, you need an overarching plan for your money. Make sure you have a plan to pay off debt (if applicable), that you have an emergency fund (or you’re building one), and that you are saving for retirement.
If you’re all set on those three goals, now you get to look around for the major purchases or other big-ticket items you want in your life.
Develop the habit of setting savings goals for the things you want to buy. It’s one of the best ways to stay out of debt.
It’s a powerful feeling when you save up cash first. You get to buy guilt-free, knowing you have the money in the bank.
Low-interest rate loans can lead you into a trap. What happens if you lose your job, or clients, or any other source of income? Debt demands payment.
Plus, debt has negative psychological consequences. It reduces your options. It’s like a continually humming background noise of low-level stress.
By saving up the money first, you know you can afford your purchase. Plus, saving before buying builds self-control. Otherwise, you are training your mind that it’s okay to buy on impulse before you have the money.
So first step, decide what you want. Then go “old school” and plan to save the money first.
2. Define Your Saving Goals Using the SMART Goal Framework
This is a helpful goal-setting framework first used by George T. Doran back in 1981.
SMART stands for Specific, Measurable, Attainable, Relevant, and Time-bound.
Let’s break this down and apply it to savings goals.
Specific —Be specific and use details to define your goal. Vague or non-specific goals don’t work because you don’t know when you’ve achieved them. The more details you use, the better the picture in your head, which makes it more real. And if it’s real in your head, you can make it real in the world.
Measurable —You can’t tell if you’ve hit a goal if you can’t measure it. For financial goals, this is easy. How much money do you need? Come up with a number, even if it’s only an estimate.
Attainable — It’s excellent to set “stretch” goals, but if they aren’t attainable, you’ll lose interest. Make sure you have room in your budget. Don’t set a goal, and hope you’ll find the money “somewhere.”
Relevant—Ask yourself if this goal is something you really want or if it’s based on someone else’s idea of what you should want. Only goals relevant to you and your values will give you the energy and drive to make them happen.
Time-bound—There needs to be a deadline for your goal; otherwise, it’s only a wish. Plus, this breaks down exactly how much per month you’ll need to save to hit your target by a certain date.
Three Flavors of Goals to Balance the Near And Far
The financial goals you could set come in three lengths:
- Short-term goals—take less than 1 year to save for. Examples could be furniture, laptops, or appliances.
- Mid-term goals—take around 1 to 5 years to achieve. Examples could be a down payment for a car, a vacation, or home remodeling projects.
- Long-term goals—take 5 years or longer to hit. Examples are house down payments, buying a used car for cash, or “buying” time off from a job, like funding mini-retirements or sabbaticals.
Whether a goal will be short, mid, or long-term depends on the combination of your earnings and your savings rate. The more money you put towards the goal, the faster you can achieve it. Long-term goals could become mid-term goals if you had extra money to put towards them.
SMART Goal Examples
Here are three SMART goal examples, ranging from short-term to long-term. Whether these goals are relevant or attainable will depend on your financial situation.
- A short-term goal of saving $600 to buy a small kitchen table set. The first SMART goal example:
I’ll save $60 a month for 10 months, so I’ll have $600 to spend on a new 4-person kitchen table.
- A mid-term goal of a bathroom remodel, which according to the Home Advisor website, costs anywhere from $6k to $15k (and up). The national average is around $10,633 as of 2020. The second SMART goal example:
I’ll put $350 month aside for 24 months, so I’ll have $8,400 available to remodel the bathroom in two years.
- A long-term goal of saving up for a house down payment, aiming for 10% of the purchase price. If you wanted a home around the $300,000 price range and wanted to put 10% down, you’ll need $30,000. This SMART goal would be:
I’ll save $420 a month for around six years until I reach $30,000 to put towards my new home.
For long-term savings goals like this, you’ll want to assess at the end of each year to see how you’re doing.
When you write out your goal using the SMART method, you move it one step closer to reality.
3. Dedicate Money to Your Goal in Your Budget or Spending Plan
Now you have a dollar amount for the “Measurable” part of your SMART goal. This should be the dollar amount you need to save each month for your plan. You’ll want to add this amount to your budget.
Here’s where you may need to adjust your goal. Will you be able to save that amount each month?
If no, you could push out the deadline. This would lower the monthly amount.
Once the math makes sense, and you know you can do this, go ahead and add it to your budget.
And congratulate yourself!
One last step, set up automatic payments. Have that dollar amount transferred from your checking account to a savings account each month. Set it up ahead of time, so you don’t have to think about it.
You’ve made your decision. Now stick with it by taking yourself out of the loop.
What If You Don’t Have A Budget? (Why Budgets Are Essential for Savings Goals)
Have you ever tried to move a kayak forward in the water using just your hands?
It doesn’t work too well, right? That’s how goal setting without a budget works. You might make a little progress, but it will get tough, and you’ll lose interest because you aren’t getting anywhere.
That’s why you need a paddle (and one of those paddle leashes so you aren’t in the situation where you lose your paddle, but now I’m off-track on this analogy).
Think of a budget as your paddle. You’re the engine that provides the power, and the paddle is the tool that helps you move through the water towards your destination.
So, your best shot at hitting financial goals is to have a budget. This way, you know how much money you can dedicate each month to make your dreams a reality. Having a budget also gives you a place to track your goals.
Set a Savings Goal to Test This For Yourself
Come up with one short-term savings goal to test this. Pick something you were planning to buy soon. Pick something easy, like $300 or less. Set a SMART goal and start saving.
See how it feels to pay cash and avoid debt.
The best way to learn any new information is to use it for yourself. By setting a small, short-term savings goal, you can experience the power and joy of setting goals and hitting them!
Develop the habit of anticipating needs and wants and saving up for them first. It’s a great habit to have on your journey to financial independence.