How do you save for the short term (big purchases, vacations, a wedding), a house downpayment, and retirement, and pay off debt at the same time? And stay sane?
It can all seem overwhelming. And if there’s one thing that makes someone shy away from anything personal finance (or anything) it’s when something seems too frustrating, complicated, and more trouble than it’s worth.
But by going over a few simple ideas I think you can make savings decisions with confidence – and feel good about the progress you’re making.
Know Your Resources
First things first, you need to know what resources you have to put towards your goals. Financially you have your paycheck, but maybe also bonuses, tax refunds, gifts, etc., all of which are great “extra” windfalls to put towards goals. You also have your time and skills to do things like earn more money, reduce your expenses, and become smarter about money in general.
I like to think of resources in 2 parts.
Part One – Real Hourly Wage
I keep mentioning this because I think it’s an amazing but often overlooked concept). Say your hourly wage according to your paycheck is $20/hour, and your paycheck says you work 40 hours a week. Chances are you know what you make a year, a month, a week, an hour…and knowing that number informs how you value your time. So a second job making $8 an hour, when compared to what your paycheck says you make, might seem like a waste of your time.
To figure out your Real Hourly Wage, first calculate the total hours a week you dedicate to your job – this includes hours actually worked as well as things like getting ready in the morning, commuting, working from home, and decompressing in front of the TV. So for example you might add 15 extra hours to your week, bringing the total to 55. Next, think about any job related expenses – would you have to own a car, use less gas, buy less clothes, eat out less if you didn’t have to go to work every day? These don’t have to be exact, but be honest with yourself. Finally, subtract your job related expenses (weekly) from your weekly pay. Then divide that pay by 55 (or however many hours you come up with) – THAT number is your Real Hourly Wage*
The reason why your Real Hourly Wage is so important is because it presents a clear picture of two resources – money and time. Knowing how much money you actually have to put towards your goals, and how much of your time you sacrificed to get it will allow you to accurately evaluate your progress. Think of it as garbage in, garbage out.
Part Two – Monthly Cash Flow
Cash Flow sounds like a fancy business term but it’s actually very relevant to you. Basically, Cash Flow = Income minus Expenses. That’s it. Why is that important? Because the remainder is what you use to put towards your goals. You can’t evaluate or reduce expenses if you don’t know what they are. You can’t make progress on anything, let alone multiple things, if your expenses are higher than your income. Where is that money going to come from?
Set Relevant Goals
Below are some common “personal finance rules”:
- If you don’t have one, establish an emergency fund of at least $1000.
- Always contribute enough to get the match on your 401k. This is free money.
- If you have credit card debt, that is your next priority after the above two. Make your minimum payments on everything else and work on that.
After that, everything becomes much more flexible. A student loan debt of $60,000 at 4% might be a crisis to one person while another might take their time paying them down and invest their money instead. There are guidelines and rules of thumb everywhere (save 15% for retirement, your emergency fund needs to be 6 months of expenses), but I think if you set goals related to what you want out of life you’ll do more to make them happen.
Prioritize, and Use A Savings Snowball to Not Get Overwhelmed
A savings snowball works just like the debt snowball – you do the minimum on everything and focus the extra on the smallest or next-in-line goal. Once that goal is met, you focus on the next goal. The beauty is that you’re not starting from scratch on the next goal. You’re adding to your progress and that gives you momentum.
For example, if your goals are to pay off your car, save for a downpayment on a house, and save for retirement, your snowball might look like this.
- Contribute enough to 401k to get employer match and transfer $100 a month to house savings account. Put any excess + windfalls/bonuses towards car.
- Once car is paid off, look at your remaining goals. You can either take all the money you were using to pay off your car and put it towards house savings, increase your 401k contribution, or do both.
A savings snowball forces you to think about what’s next while at the same time not overwhelming you because you’re already working on the next goals. In my experience, knowing a) what my next goal is, and b) that I’ve already started on it makes me much more excited to finish the goal I’m on now.
Track Your Progress!
I think the number one way to track your progress (especially when you have multiple money goals) is through Net Worth.
Knowing when your car will be paid off is a great motivator and having that date in mind is important. But it’s also important to see the progress you’re still making in other areas, since it can feel like all your energy is directed at one goal. Tracking your Net Worth (it takes 5 minutes to set up an account at Personal Capital) takes away that feeling of “not doing enough of everything”. When you see how much progress you make just by doing the minimum you can’t help but think “what will happen when I don’t have a car payment anymore”.
When writing this article I couldn’t find a whole lot written recently about “savings snowballs”. But I really do think it’s the best method to save for multiple goals – especially short term and long term at the same time.
Readers: how do you save for multiple goals? How do you track your progress, and how has that motivated you?