Saving is about setting aside money for the future. But it’s just as important to know what you’re saving the money for. That’s why it’s a good idea to have financial goals. Specific goals can help you stay focused and target your savings.
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What are some good reasons to save?
Imagine an empty mason jar. Each week you put your change into it. Maybe you wrote on the lid of the jar dining out fund. Slowly, as the coins add up, you get closer to your goal of a nice meal. Saving is simply a way to put money aside for a goal. How much you save depends on what you’re saving for and when you’ll need the money. There are many reasons to save, including to cover expenses for:
- Surprise bills and emergencies – Building an emergency fund means it will be easier to deal with unexpected events without taking on debt, and with less stress. With an emergency fund, you might be able to cover the costs of an emergency home repair or make ends meet for a few months if you are between jobs. Any financial cushion is better than none.
- Short-term goals – A goal that’s less than three years away is a short-term goal. For example, paying for a wedding, a kitchen renovation or a dream vacation are short-term goals that may take more than a few months to save for. The more you have saved the easier it will be to pay for and the less likely you will need to use a credit card or take a loan to cover some of the costs. Learn more about saving for short-term goals.
- Long-term goals – If you haven’t thought about retirement planning yet, this is a great time to start. The sooner you start, the longer time horizon you’ll have to save or invest the money you’ll need for an enjoyable retirement. Learn more about saving for long-term goals.
- Helping family and loved ones – Having money set aside can help you support your family or others in your circle if they need it. This could mean helping a friend or family member start a business or getting ready to take care of aging parents. Or you may simply want to help someone get through a tough time. Read steps to offering a financial lifeline to know how much support you could offer.
- Having more personal choices – You have more freedom to make changes in your life with a financial cushion. Savings can help you launch new opportunities such as starting your own business, studying part-time or full-time, or moving to a new city.
If you want to save but are having trouble finding room in your budget, consider these ten tips for reducing your expenses.
How can you define your financial goals?
It’s easier to stay motivated when you know what you’re saving for. But it can also feel overwhelming if you’re not sure where to start. Follow these tips to define your financial goals:
1. Write down your goals and choose your top 3
As a first step simply write down your ideas. Consider not just what you want to achieve, but why it’s important to you. It may be that you have one or two clear goals that you can put into action right away. But it’s also likely you may find that you have many things to save for — perhaps more than you can reasonably save for every month. When you first start saving, choose just a few top financial goals to focus on.
2. Be as specific as possible
It’s easier to target your focus for saving if you can picture exactly what you want to save for. So, try to be as specific as possible. For example, if one of your goals is to take a dream vacation around the world, write down which countries you want to visit, how long the trip will last, and how much you think it will cost. Will you travel solo or with a friend or partner who will share some costs? Getting specific about what you’re saving for will help you come up with an accurate dollar amount. It will also help you stay focused on reaching your goal.
Even during market downturns, it’s a good idea to keep saving. Watch our video on saving during inflation.
3. Rank your goals in order of importance
After setting your goals, you may find that you have goals that conflict. For example, many parents find themselves choosing between saving for their own retirement or their children’s education.
If you must choose between two or more goals, ask yourself which goal causes the least harm if you don’t reach it. Sometimes you have to set one goal aside to reach a more important goal, even if it’s just a temporary adjustment. You may also choose to save for both goals by putting away a little less for each.
Also, remember it’s likely that your situation will change. If you have to re-prioritize your goals now, it doesn’t mean you will always need to make the same trade-offs in the future.
4. Check in on your goals at least once a year
Change is normal. You may switch jobs, get married, or move to a new city. Any significant life change will have some effect on your budgeting and savings habits. Take this opportunity to review your savings goals, either once a year or when you’re going through a personal change. Adjust your savings goals if you need to.
If you’re having trouble figuring out where to prioritize your spending, try looking at your budget with the lens of needs versus wants. Once you’ve decided if something is a ‘need’ or a ‘want’, your priorities might fall into place more easily.
What are ways to make saving a habit?
Knowing what you’re saving for is the first step in setting a goal. When you have a clear savings goal in mind, it makes it easier to keep up the habit. You can then focus your discretionary spending in ways that won’t jeopardize your regular savings contributions.
The next important step is knowing how much you can set aside each month. There are a few ways you can approach this:
- Set a fixed weekly or monthly amount that you save automatically.
- Set a percentage of your take-home pay that you will save each month, for example, 10%. If your income changes, you can adjust this amount up or down.
- Figure out how much you need to save for your goal and when, and then divide that amount by the number of months. For example, if you need $3,000 for a vacation in a year, this would mean saving $250 each month for 12 months.
Once you know how much you’re saving each month, try setting it up as an automatic transfer to your savings account. Even better, you can time the savings deposit to come out of your chequing account on the same day as your paycheque.
It’s better to save smaller amounts at first that you can keep up with, than to try saving larger amounts that will jeopardize your necessary day-to-day expenses. The important thing is to start the savings habit. Even putting aside $20 a week is a helpful habit to get into.
Many of us tend to treat money differently based on how we obtain it or what we intend to spend it on. For example, we might carefully plan how to spend our paycheques but be more spontaneous with income from tax returns or our GST/HST credit. This is called mental accounting and it significantly affects how we choose to spend, save and invest. Watch for how mental accounting could help or hinder your saving habits.
Summary
Knowing your financial goals can help you keep your savings on track. It’s a good idea to:
- Write down your goals. Remember you can have more than one goal.
- Start small and build your savings habit.
- Be as specific as you can. This will help you know how much you need to save.
- Prioritize your goals if they conflict.
- Revisit your goals every year.
