After the bills are paid and the groceries are purchased, it can be hard to find even a little money to put into savings. But as you plan your budget for the month, having a savings plan can be key to accomplishing your financial goals. Where you put your savings and exactly how much you save will depend on your personal financial situation. But there are 5 things you can do to prioritize your savings goals.
1. Separate Wants and Needs
Prioritizing your savings goals starts with separating needs and wants. Your needs include buying food, clothes, healthcare, and shelter. Beyond that, needs will vary from person to person. This exercise isn’t necessarily meant to tell you what you can and can’t buy. But it should help you separate your money into different budget categories and let you know what you have to buy every month. It also gives you a good idea of how much money you can put toward savings and discretionary spending.
2. Try the 50/30/20 Rule
Even after separating needs from wants, the categories can sometimes get confused. You have to spend money on housing. But how much housing can you afford? The same goes for clothes and food. To avoid overspending, try the 50/30/20 Rule. This rule says that you should spend no more than 50% of your net income on needs. After that, reserve 30% for wants and 20% for savings. To be safe, set aside your savings first. Then spend money on your needs. If you’ve planned it right, you should have 30% of your income left over to buy whatever you want.
3. Pay Off Your Debts
Interest rates on loans are usually higher than a typical savings account. So if you’re paying more interest than you’re earning on your savings, you’re probably losing money. As part of your savings plan, prioritize debt reduction. Make extra payments on your high interest loans, but also have balance between saving and paying off loans. After all, if you don’t have any savings, you may have to go deeper in debt to pay off unexpected emergencies and other expenses.
4. Plan for Emergencies
You’ve set aside 20% of your income for savings. But where should that money go? Again, this will depend on individual circumstances. Many experts say that you should prioritize saving for emergencies. In fact, experts recommend having enough money to cover three months of living expenses. This emergency money should be readily available. But you should also separate it from the money you use every day. Putting it in a separate savings account or money market account is a good way to keep it off limits. And it may help you earn some additional interest as well. Use emergency money for serious financial events like losing your job, major property repairs, or emergency medical expenses.
5. Save for Retirement
Saving for retirement is a priority for many, but the same plan doesn't necessarily work for everyone. When it comes to saving for your retirement, select a method that works best for you and your current financial situation. There are several different methods to saving for retirement, so it's a good idea to do your research to understand which will be right for you. Then, put as much money as you are able to into that account each month or pay period. You'll thank yourself later for making retirement a savings priority now.
Saving money is a necessary part of every budget. With a plan to save money and pay down your debts, you can be that much closer to your financial goals in the new year.