How Much Do You Need To Save For Your Goals?
On this page, you will:
- learn how to calculate the extra cash you need to save to achieve your goals.
How much extra do you need to save every month to achieve your goals? How long do you need to save? Where do you start?
The answer is it depends. If you are planning to save between a few months to 3 years, then follow the examples below. These examples will show your the basics of budgeting.
If you are planning to save for long term like education fund and retirement fund, then you should use an online savings calculator.
Either way, it will be beneficial if you could get some understanding on the basics of budgeting as shown below.
Example: Savings for 1 goal.
Goal: Save a down payment of $1,200 for a new car in 12 months.
Workings:
Use $1,200 divide by 12 months.
$1,200/12 = $100 per month.
Therefore you need to save $100 every month for 12 months. At the end of 12 months you should have saved $1,200 for the down payment of the car.
Example: Savings for 1 goal.
Goal: Pay off outstanding credit card balance of $2,700 in 9 months.
Workings:
Use $2,700 divide by 9 months.
$2,700/9 = $300 per month.
Therefore, you need to allocate $300 every month for 9 months to pay your outstanding credit card balance. At the end of 9 months you should not have any outstanding balance in your credit card anymore.
Note that for simple calculation in this example, I have assumed that the interest charge on the outstanding credit card balance is 0%. It is common to have 0% interest charges when you take advantage of promotions and offers by banks when you transfer your balance from one credit card to another credit card.
Often you will have more than one goal. We will now learn how to calculate your monthly savings for two goals.
Example: Savings for 2 Goals.
Goal 1. Save a down payment of $1,200 for a new car in 12 months.
Goal 2. Pay off outstanding credit card balance of $2,700 in 9 months.
Workings:
i) $1,200/12 = $100 per month.
ii) $2,700/9 = $300 per month.
Month | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Car | 100 | 100 | 100 | 100 | 100 | 100 | 100 |
Credit Card | 300 | 300 | 300 | 300 | 300 | 300 | 300 |
Total | 400 | 400 | 400 | 400 | 400 | 400 | 400 |
Month | 8 | 9 | 10 | 11 | 12 | Total |
Car | 100 | 100 | 100 | 100 | 100 | 1,200 |
Credit Card | 300 | 300 | 2,700 | |||
Total | 400 | 400 | 100 | 100 | 100 | 3,900 |
As you can see from Example 3, from the 1st until the 9th month you will need to save $400 a month and from the 10th until the 12th month you will need to save $100 a month.
Now I want to introduce to you a method I call average savings. In the example above, you see that you need to save more in the beginning but towards the end you save less. In this situation there is room for you to lessen your monthly savings. For example, if it is impossible to save an extra $400 a month, then you can adjust your savings to get to a lower amount of monthly savings. Take a look at the example below. The amount needed a month is $325.
Example: 2 Goals, Average Savings.
Month | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Car | 25 | 25 | 25 | 25 | 25 | 25 | 25 |
Credit Card | 300 | 300 | 300 | 300 | 300 | 300 | 300 |
Total | 325 | 325 | 325 | 325 | 325 | 325 | 325 |
Month | 8 | 9 | 10 | 11 | 12 | Total |
Car | 25 | 25 | 325 | 325 | 325 | 1,200 |
Credit Card | 300 | 300 | 2,700 | |||
Total | 325 | 325 | 325 | 325 | 325 | 2,900 |
As you can see, instead of needing to save $400, you now only need to save $325 in the beginning months. This method of averaging your savings is especially useful to you if you are short of cash.
If you are having difficulty trying to average out your cash flow using pen and paper, then I suggest that you use Monopoly money and allocate the money to the different goals one month by one month.
It is alright if your average monthly savings is not the same every month. For the example above, you could save $325 for 1st month, then $335 for 2nd month and $315 for the 3rd month. What is more important is that at the end of 9 months you have $2,700 for your credit card and at the end of 12 months you have $1,200 for your car.
After you have worked out the monthly savings, you may find that you need to save a lot of money in the starting months. You may also feel that it is difficult or even impossible to save this much when you are now trying to make ends meet every month. My advice to you is that for now you don't have to worry about this. Later we will look into the various ways to find the extra cash that you need to achieve your goals.
Next: Build Your Cash Flow Statement.
Previous: Goal Setting.