Savings Goals

I discussed ways of reducing your spending, but now I'd like to go over some things you can do as incentive to help. It helps if you can have some incremental and easily attainable goals so that you can gradually put aside a small amount for when you need it.

So what kind of goals can you set? With the uncertainty of the economy, one thing to do is to build up a cushion to take care of expenses if you should need to. No one ever wants to have to dip into such stockpiles but think if you're income were lessened, how long would you be able to ride it out?

Look at your budget in a little detail. How much is your gas bill each month? Or how much is your power bill each month? Make a list of each of your monthly recurring expenses. Pick one of them and determine to save enough to pay that. When you have accomplished that, pick a second expense and slowly start to put enough aside from what you save to pay that, as well.

Set up a simple spreadsheet of your expenses. In one column place the expense type, in the next place the amount each month. If you are looking at something like car or house insurance or property taxes may be paid annually or semi-annually divide the amount by 12 or 6 to figure out how much that expense equates to each month.

If the first item in your list is the power bill and it runs, on average, $78 per month then, when you have set aside that amount, place a "1" in the third column next to that bill. You have just saved enough of a cushion to pay one month of power. Pick a second expense and continue saving until you can put a "1" in that row, too. What do you do when you have saved enough to put a "1" in each row? Simple, keep going and turn those "1"s into "2"s!

There are various recommendations out there as to how much you should have set aside. Can you cover three months? Six months? What happens if an unexpected expense occurs? Many people cannot cover this when it occurs. One extra thing I do is to factor in an unexpected cost for each month. It varies depending upon the person but start with something manageable and add that to your list as well.

Here is an important consideration: Where do I put my reserve? You want it to remin fairly liquid, meaning that you can access it when you really need it. A 12-month certificate of deposit (or CD) is not "liquid" since you may have to wait several months before you can use the money. You should, however, make sure that it is not too easy to use or the temptation to raid it may be too great depending upon your willpower! If you can, place it in its own account. This may not always be practical since many bank accounts are set up so that interest is tiered.

What do I mean by tiered interest? It stimply means that you get a different interest rate depending upon how much money is in the account. For example, the money up to $4999 may earn 0.10% interest but the money from $5000 to $9999 may earn 0.15% interest. Neither of these amounts is great, especially compared to what interest rates used to be, but you have to take what you can get. If you have $4800 in the account and your reserve is $600, if you have it in a separate account you will have two sets of money both earning 0.10% This is not ideal. The better thing to do is to use a "false bottom" for your account and combine the two sums in the same account. That way at least part of it will be earning at the higher interest rate. To establish a "false bottom" simply do not add the reserve mounts that you deposit into your checkbook. So, in the above example, your checkbook would show a balance of $4800 but the account would actually have $5400 in it.

You can always see how much you actually have by asking the bank, checking your statements, or keeping track of your reserve in another spreadsheet. But, by not showing it in your checkbook, it is a little more "out of sight, out of mind" and you will be reminded of its purpose should you be tempted to spend it.