How much money should I be saving every month? If we had a nickel for every time we get asked that question here at 5280 Associates… but we love hearing it! This is where our expertise and our creativity meet to tailor a plan just for you. It comes down to setting personal goals and managing spending to meet those goals.
Setting your financial goals may seem like a no-brainer, but setting GOOD goals takes thoughtfulness and subtlety – which is why in 1981, George Doran used the acronym S.M.A.R.T. to teach his now widely used goal setting technique. S.M.A.R.T stands for Specific, Measurable, Attainable, Relevant, and Timely, as described in detail below.
Include as much detail as possible. What is it that you are striving for? Why is it important to you? Does it involve other people?
It’s easy to set a vague retirement goal, for example, “I’d like to retire in my sixties.” Instead, be detailed and focus on specifics. “I’d like to retire at age 62 with $1 million dollars in retirement assets, no debt, and a spending ability of $75,000 per year throughout retirement.”
Specificity is extremely important as it will allow you to how far you’ve progressed, and most importantly, celebrate when you know you’ve hit your goal!
A measurable goal is an effective goal. If you can’t measure it, how will you track your progress? “I want to have more control over my finances” is not a measurable or specific goal. Instead utilize quantitative data, put numbers on the page, and apply a benchmark. For example, “I want to save $50,000 in 3 years to buy a home and reduce my monthly spending down to $2,000/month in order to afford the mortgage payment.” At one year, you can easily measure your progress. Have you saved $16,667? Have you reduced your monthly spending by $667? If so, you are on point! When you have a way to measure your goal, you can know for sure that you are on track to achieve it.
Shoot for the moon, but within reason. When setting attainable goals, you are walking a fine line between pushing yourself out of your comfort zone and being realistic with your resources. A great planner will help you to know the difference and find that line – then you can run on it towards your destination: financial success and stability!
Now that we have laid the groundwork for setting goals by making sure they are specific, measurable and attainable, we need to determine their relevance. Where does the goal fit in the overall game plan? Where do you want to first spend your time and energy? A couple may have two major goals – retiring early at the age of 55 AND paying for their children’s college education. They may need to prioritize one of those goals over the other at first, to ensure success for both.
The phrase “due date” might make you feel like you are back in school, but we all know a clear deadline can push us to get something done – especially if we are prone to procrastination! A timely goal has a beginning, middle, and most importantly, a solid end. When do you want to achieve your goal? What are the short- and long-term objectives you need to reach the destination – and when do you ultimately want to cross that finish line? A strategic approach in this step of the process will help provide clarity and lay the groundwork for determining your savings blueprint.
Did you know a study conducted in 2017 determined that 78% of US workers are living paycheck to paycheck? Furthermore, another study controlled by the Federal Reserve Board found that nearly 44% of respondents could not cover an unexpected $400 emergency expense.
These statistics highlight the fact that many Americans struggle financially. Numerous factors come into play to create this scenario, but one overarching theme is an inability to delay gratification.
When it comes to financial planning, delayed gratification can be difficult to swallow because you often won’t see the results for 10, 20, 30 years or more. It’s much easier in the short run to spend money on what brings pleasure now, instead of planning for the future. How do we combat this common money mistake? It all boils down to having a plan, a S.M.A.R.T set of goals, and the willpower to accomplish your dreams.
There is no one size fits all approach to savings strategies. However, there are some basic tactics that we find useful in achieving your goals. A rule of thumb that we use at 5280 Associates is to be saving roughly 20% of your pretax income. Gulp. Did that make you spit out your morning coffee? Don’t worry if you are lagging in this area at the moment. It may take some sacrifice and diligence, but we can guide you in getting there, while still having a lot of fun with your money in the present.
How can we help? By aiding you in creating a realistic budget for your monthly expenses. The word “budget” may be a four-letter word in your mind, but we promise it’s not so bad! Some experts describe budgeting as permission to spend. You are simply telling your money where to go and when to go there. You control it, instead of it controlling you! We often recommend using Mintrough Intuit, which provides budgeting tools as well as other useful information, but there are many other budgeting tools that can help as well. A budget helps you to cut spending on unnecessary expenses and reposition those funds into various savings accounts. Periodically you may feel the burn of denying yourself some instant gratification, but you will soon feel the pleasure of viewing your growing account balances.
When it comes to driving retirement success your savings rate is by far the most influential factor. In fact, a study done by the ASPPA Journal in the summer of 2011 shows that your savings rate is 5 times more important than asset allocation, 30 times more important than actuarial assessment and intervention and 45 times more important than asset quality. Most financial advisors are accustomed to focusing on investment returns, asset quality and fees but not on the factor that truly matters, your overall savings rate. Instead of focusing on choosing the “best” investments to park your funds, spend your time and energy determining how you can increase your savings rate and improve your asset allocation – the two main drivers of retirement success. A good advisor will remind you that you will never be able to control your investment returns, but you are always in control of your rate of savings.
For more information regarding the study performed by the ASPPA Journal click here and below are just a few quick tips to help you save more:
— Automate everything. If you give yourself the opportunity to “think” about putting $100 in your savings account, you just might “think” yourself out of it!
— Avoid “lifestyle creep”. Your quality of life matters and you should enjoy an income increase but be strategic and don’t waste your hard-earned money. Create a “livable” budget now, and as your income increases, increase your savings at the same degree.
— Don’t get caught up in the comparison game. Create your own life and work toward your own personal goals. What do you want? How do you want to live? Stay focused on the answers to those questions and create a budget that truly reflects your values and desires.
In closing, saving can be intimidating and at times you may feel like you are sacrificing a great deal, but it will get easier. Once you set your goals, determine your savings amounts, and start contributing, you will begin to form a habit. After a month or two of committing to the plan, the peace of mind will set in and you will feel at ease and more accustomed to your new spending habits. Start small and increase incrementally over time. Even if you determine you can only save 5% of your income, start there, and increase when possible. The key here is to start as soon as possible and never stop. Be patient, be S.M.A.R.T. and plan for the future you want most.