Effective ways to set savings goals and achieve them (1)
6/11/2024
Navicore sat down with Affinity Federal Credit Union's External Affairs & Financial Education Manager, Grant Gallagher, to discuss savings goals and maximizing your savings. Here's what he had to say:
How can someone effectively budget their income to prioritize saving money?
Effective budgeting requires you to establish a system that works for you and that you will regularly use. Building savings into your budget is a key way to prioritize savings, but it is meaningless unless you have established goals first, which you are working towards. The motivation to save comes from the goals attached to those savings. Without it, there’s not enough to discourage you from breaking your budget and avoid the temptation to borrow the joy from your future self.
Many people make this mistake when creating a budget. Your budget should always incorporate your financial goals. It can support multiple goals, both behavioral, such as curbing impulsive spending, and objective, such as saving for a wedding. Budgeting shouldn’t just be an exercise you do occasionally to help keep the bills paid and then be filed away in a drawer.
What are some long-term saving goals people should consider and how can they achieve them?
The most common long-term goals include buying a home and saving for retirement, but there’s no limit as to what a long-term savings goal can be. Anything you are looking to achieve in your financial life that can take longer than 5 years would generally fall into this category, and that’s because these are typically large goals that will take slow and steady progress. Consistency is key. Most people will work towards their long-term goals by putting away a portion of their salary each month. The most effective way to do this is by automating the process through payroll allocations or utilizing automatic bank transfers. Creating the habit of saving is hard, but technology can make things easier by doing it for you. Utilizing banking products like certificates of deposit or retirement accounts, which restrict your ability to access the funds, can also help keep you from dipping into your savings.
High-yield savings accounts are also a great option to help you grow your money, while still keeping it accessible.
Investment accounts can also help you reach your goals more quickly, but have a higher level of risk associated with them than traditional banking products. It’s recommended to explore a savings approach that utilizes all of these options to have a balance of risk, growth, and accessibility.
How can one leverage technology and apps to save money effortlessly?
There are two important steps to leveraging technology to enhance your savings: identifying opportunities to cut back to save more and automating your savings. Budgeting apps auto-categorize your spending and will often help you understand your spending patterns and where you might be able to cut back. Now that you have identified where you can cut back, move that amount of money over to your savings “bucket” in your budget. Manually making transfers to save is setting yourself up for failure; manually moving the money can be psychologically painful, you're reminded of how far away you are from your savings goal every time you see the balance, and of course, simply needing to remember to make the transfer can be a major barrier for many.
What are the pros and cons of various saving methods like traditional savings accounts, investment accounts, or retirement plans?
Savings accounts, investment accounts, and retirement plans can be good options for saving, but not every option works for all situations. All of these accounts balance things like interest rate or growth potential, accessibility to the funds, and cost.
For example, everyone should have an emergency fund, but it should rarely be locked in a retirement account or an investment account because of the limited accessibility to the funds in those types of accounts. In general, your traditional savings account will be the most accessible and have the lowest cost, but also provide the lowest return.
Modern investment accounts vary wildly, allowing you to invest in extremely volatile and speculative items such as cryptocurrency ETFs, to much more low-risk items such as treasury bond funds, so there is no one-size-fits-all rule. Generally, your money is locked into the investment vehicles that are part of your portfolio. That means you would need to sell those items and transfer the proceeds to use that money, and fees may apply. Investment accounts can be used for short-term savings, but are generally better for medium to long-term savings, as it may take days to liquidate your assets and gain access to cash in an emergency.
Retirement accounts are relatively self-explanatory, as their main use is right in the name. These are best for long-term savings, specifically for retirement, and have the lowest accessibility of the savings options, but can benefit from having lower fees, and higher growth potential. Money in retirement accounts is not entirely locked up until retirement though, and most of the time your retirement account can be borrowed against. This should only be used as a last resort, as it will generally have some fees and costs associated with taking the money early.
Can you talk about the difference between having an emergency fund and sinking funds? Do you need to have both?
An emergency fund is a savings where you are putting money away for a rainy day. Maybe your car breaks down and you have to fix it, or your hot water heater blows, you can take the money from that savings account and use it to help you out in that time of need.
A sinking fund is a pool of money you can use towards your goals or pull from to pay off debt. This can be anything from student loans to car payments. It is essential to have both account types to have strong financial well-being and security. You'll want to have that rainy day money to provide peace of mind that your next emergency expense is taken care of, but you'll also want the emotional benefit of making progress against saving towards your goals or chipping away at your debt.
Can you speak to the value of making small consistent changes to your lifestyle to both increase your income and work towards decreasing your debt load?
Making big changes in your life can be hard, and this rings true for your financial life as well. Small changes can make a big difference in the long run because you can make slow and steady progress. Incremental progress allows you to slowly change your behavior and can gain momentum over time. Maybe it’s cutting back on your spending, or taking on extra work to boost your income, these changes can be overwhelming if you take on too much, too quickly. Living within your means to ensure you don’t end up working paycheck to paycheck is a good start if you’re overspending. The same rings true for putting purchases on credit: if you don’t think you can pay it off at the end of the month, don’t purchase that item wait and save to get it instead.
What are some creative ways to earn extra income to supplement savings efforts?
With the current economy and market environment you may need to work in a Gig economy, finding a side hustle or extra money to supplement your savings account. There are lots of low-cost crafts and hobbies that can be converted into a source of income. Doing things like making and selling candles at a local flee market or making bracelets and selling them on Etsy can be creative ways to build that extra money. Don’t lie to yourself though, when you are crafting with the goal of selling your crafts, it’s no longer a hobby, it’s work, and it’s going to feel like work. If you rely on a hobby to unwind in your leisure time, it’s probably not the best option to convert to an income stream.
How can families involve children in saving money and teach them financial responsibility from a young age?
Much of money is digital and it can be hard for younger children to conceptualize money as a tangible resource as opposed to numbers on a screen. Starting your children out by giving them some small chores to earn an allowance helps them create the connection between work and pay. Furthermore, this should be done in cash and kept in a clear “piggy” bank so that savings progress is visible. You can also help them understand the value of saving by creating some financial goals together. If they want to spend money from their bank, it’s a good opportunity to talk about needs vs. wants, and that they need to choose and prioritize what they spend their money on.
How can someone break the cycle of living paycheck to paycheck and start building a financial safety net?
Getting rid of unwanted expenses is essential, but that doesn’t mean eliminating all the treats from your budget. Little daily expenses that can add up, but don’t provide a lot of value should be the first to go. Going out for Dunkin or Starbucks every morning for coffee may need to stop, making coffee at home every day can save you 5-10 dollars a day. Cooking at home instead of going out to eat can cut down on unwanted spending and help build a safety net so you aren’t waiting and struggling for that next paycheck. These two small changes often can lead to hundreds of dollars annually in savings. You don’t need to cut these things out entirely, but figure out what you can reasonably fit into your budget. Maybe that daily Starbucks will become a Friday treat, and eating out is only once a month or for celebrations.
How can individuals negotiate better deals on services like utilities, insurance, or rent?
Looking for deals is the key, but even if you’re not looking to switch providers for things like cell phones or the internet, you can often use competitors' deals against one another to lower your current bill. Getting competitors' quotes also gives you bargaining power when it comes to insurance.
It also never hurts to call and ask what promotions they currently have, but the most tried and true method for non-vital services is asking to cancel. They often have retention deals for anyone who requests a cancellation for anything except moving house. If those aren’t options, shopping around is your next best option.
There aren’t many tricks to finding that apartment or condo where the rent is more affordable, but you can likely get better deals by being patient and less selective. Any units sitting unoccupied are lost income for the owner, so if an apartment is sitting unoccupied for a while you can often use that to your advantage when it comes to pricing. The asking price isn’t always firm and becomes more flexible if the housing has any issues you can overlook.