Turning Goals into Monthly Savings Plans

"Save more" is a wish. "Save a set amount every month until a date for a named purpose" is a plan, and plans get funded. Most savings goals fail not for lack of money but because they are never turned into a monthly number with a deadline and a separate place to collect it. This chapter shows how to make that translation for any goal, how to handle predictable bills that are not emergencies, how saving ahead compares with borrowing, and how to divide your saving among several goals at once.

Why vague goals stall

Research on goal setting, much of it summarized by Edwin Locke and Gary Latham, finds that specific, challenging goals lead to better performance than vague intentions such as "do your best". A goal you can measure tells you each month whether you are on track, which is what keeps you going.

A common checklist is the SMART framework, first set out by George Doran in 1981:

• Specific: what exactly is the money for?
• Measurable: how much, in total?
• Achievable: is the monthly amount realistic alongside everything else?
• Relevant: does it matter enough to you to keep funding it?
• Time-bound: by what date?

"Save for a house" becomes "save a down payment and closing costs for a home in our area by a date three years from now, by transferring a fixed amount each payday into an account named House". Each part of the second version can be checked.

Three time frames

Goals fall naturally into three groups, and the group decides where the money sits (chapter 5) and how flexible the plan can be:

• Short-term, under a year: holidays, annual bills, a new laptop. Savings account, named bucket.
• Medium-term, one to five years: a car, a wedding, a down payment, a career break. Mostly savings, perhaps CDs or Treasury bills timed to the date.
• Long-term, more than five years: education, financial independence, retirement. Usually invested, in tax-advantaged accounts where possible.

Work backwards from the date

The method is the same for any goal: start from the total and the date, and work back to a monthly amount.

1. Price it. Look up a realistic total, including the extras people forget: closing costs for a home, taxes and registration for a car, travel and gifts around a wedding.
2. Subtract what you have. Any money already set aside counts.
3. Count the months until you need it.
4. Divide. The remaining amount divided by the months is your monthly target. Interest at savings rates helps a little, so this is slightly conservative.

A household that already has $5,000 set aside and saves $900 a month for 3 years, in an account paying an assumed 4.0%, reaches $39,951. Of that, $37,400 is its own money and $2,551 is interest. The interest helps, but the monthly amount does most of the work, which is why the date and the deposit matter more than chasing the highest rate. The down payment savings calculator does this for a home purchase, including closing costs and tax on the interest.

If the monthly number is more than you can manage, there are only three levers: a later date, a smaller goal, or more income or less spending elsewhere. Choosing among them deliberately is better than letting the goal quietly slide.

Sinking funds for bills you can see coming

Many of the costs that wreck a budget are not surprises at all. Car insurance billed every six or twelve months, holiday gifts, property tax, a car's tyres and servicing, annual subscriptions and a replacement phone all arrive on a rough schedule. A sinking fund is money set aside for each such cost, a little every month.

Setting aside $100 a month builds $1,200 by the time a yearly bill of that size is due, and the bill stops being a crisis. The same arithmetic works for every irregular cost: divide the expected amount by the months until it is due. The subscription cost calculator helps you list and total recurring charges.

Sinking funds also protect the emergency fund. When every predictable cost has its own bucket, the emergency fund is only touched for real emergencies.

Saving ahead versus borrowing

For large purchases, the main alternative to saving is borrowing, and interest makes the difference visible.

Borrowing $20,000 at 7.5% for 5 years costs $401 a month and $4,046 in interest over the loan. Saving a similar monthly amount ahead of the purchase instead earns interest rather than paying it, and leaves you free to buy when the right car appears rather than when a loan is approved. Borrowing is sometimes the right choice, for example when a car is needed for work now, or for a home, which few people could buy without a mortgage. The true cost of a car calculator shows the full cost of ownership, financing included.

Juggling several goals

Most households save for more than one thing at once. There are three common ways to divide the money, each with a trade-off:

• One at a time, in priority order. Each goal finishes fastest, but goals at the back of the queue wait a long time, and the delay can sap motivation.
• All at once, in proportion. Every goal moves every month, which keeps motivation up, but each takes longer to finish.
• A hybrid. Fund the foundation first, an emergency fund and any employer match, then split the rest across goals by urgency.

Whatever you choose, the dates are what make the plan honest. If the monthly totals add up to more than you save, something must move, and it is better to decide which goal waits than to fall short on all of them.

Track it so you can see it

Progress you can see sustains effort. Separate named accounts make tracking almost automatic, because each balance is the progress. A monthly check of five minutes is enough: is each goal on track for its date, and does anything need to change? Marking milestones at a quarter, half and three-quarters of the way, with a small planned reward, works with the habit loop described in chapter 1.