Picture Perfect Savings

The term “savings” is such a high-level, all-compassing one. It can instill fear and loathing in many, while bringing a smile to others’ faces. For too long, I believe many have taken the notion of savings and just thought of it as this existential thing you threw money into and watched grow without taking any action on it.

Now, if you have been setting aside money for “savings”, you’re on the right track. I believe that it is important to set aside money from each paycheck to pay yourself, if you will. Where this can get you in trouble, or just be plain monotonous, is when you’re setting aside money without having any real, actionable plan for what it is for and how you’ll use it. No, simply saying it’s “for a rainy day” does not count.

In a past installment of Daily Dimes, I wrote about one writer that urged readers to look at savings like drawers in a dresser. I believe this is the right start. It forces you to break down “savings” into smaller, more digestible chunks — or goals. While your dressers could take on entirely different meanings, by attaching a picture to it, you can begin to visualize just how setting aside this money will help you in the long and short term.

I was one of those people that used to blindly set aside money for savings, and felt it was pointless since it just grew and grew and I felt bad every time I considered drawing from it. Let me show you how to make your savings more actionable and tangible.

First, get rid of the idea that savings are only for emergencies. Yes, an emergency fund — a stash of at least three to six months of cash that can carry you in case of an unforeseen expense or job loss — is necessary. In fact, I believe this is the first savings block you should save for. Let’s say you have already saved up that cash, and now want to save for “other things”.

First, take a sheet of paper and write down your finance-related goals. Ask yourself what you’d like to achieve in both the short term and long term. For example, these are mine:

• eliminate debt;
• build up retirement;
• purchase a home;
• become financially independent; and
• take a great vacation.

Then, reorder this list in order of immediacy:

• take a great vacation;
• eliminate debt;
• build up retirement;
• purchase a home; and
• become financially independent.

Now take a look at this list again. Can you make any of these more actionable, more tangible? For me, it’s only a few:

• pocket money for family cruise next summer;
• extra money on top of monthly payments to expedite paying off my federal student loans;
• contribute to my Roth IRA (I already have part of my paycheck automatically debited to contribute to an employer-sponsored 401(k));
• buy a home; and
• become financially independent.

If some of these goals are so far off in the future that you can’t really make them more tangible yet, don’t eliminate these goals. Rather, focus on what you can impact now, items that are coming up soon. Go into your budget book and turn to a fresh page. Title it “savings goals”. At the top of each column, I’d enter following headings (depending on your particular savings goals, the names may be different):

• emergency fund;
• summer vacation;
• extra loan $;
• Roth IRA; and
• future (for me that encompasses home buying, independence, etc.)

Take your savings and actively allocate money each paycheck toward those goals. It is also helpful if you know exactly how much money you want to set aside. For example, $600 for vacation, $1,000 for loan, etc. Let’s say every two weeks you have $300 to put toward savings. You’ve already reached what you need for an emergency fund, so don’t worry about that. Put in more money toward the shorter-term goals — say $80 for summer vacation, $80 for extra loan money, and $80 for Roth IRA. Then you have $60 left to stash away in “future”. Play with the allocations how you see fit, but I suggest putting more money aside for short-term items, that way you can achieve those goals faster.

Now you can actively see just how your savings discipline is paying off. At the end of each month, you’ll find you have gained more ground on your goals!

Once you’ve reached a particular goal — you’re leaning over the edge of the Carnival cruise ship leaving port in New York as we speak — you can then take that $80 and apply it to other goals. Say the holiday season is coming around in a few months — figure out how many people you need to buy gifts for, how much money you’ll spend on each person, and make a new column for that goal until you reach it.

This way, you’re still being responsible but can see the fruits of your labor more tangibly. Instead of lumping all of your savings without separating it and then fretting when you take out a few hundred dollars for vacation, you’ll see that you’re not sacrificing from an emergency fund or retirement … you’re only taking out the money that you’ve worked hard to save for vacation.

Now, will this have the same affect on the total balance of your savings account? Sure. This is purely psychological, but necessary. For starters, by breaking this down into smaller pieces, you can more accurately monitor how well (or not well) you’re working toward these goals and adjust accordingly. Additionally, every time you achieve a small savings goal, it adds fuel to your fire of continuing to regularly save money out of each paycheck. This will only work to our benefit as we get older and find we need to save more money for loftier goals, like a down payment on a home.

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