Saving money is never easy, but it’s undoubtedly one of the most important things everyone must do. Yet, it is common to start saving money only to abandon your efforts shortly after. This typically happens when you start saving without clear goals.
Saving without a specific goal in mind can make it challenging to stay motivated. On the other hand, having a clear purpose for your savings can provide a sense of direction and help you stay focused. This is why you need to create a goal-based saving plan.
Saving money is a long-term commitment and a habit that takes time to develop. Without a clear strategy to guide you, you might save less than you should, dig into your savings along the journey, and struggle to achieve long-term financial goals like buying a house or retiring. A goal-based saving plan is meant to help you avoid any of those effects.
This article will explore what a goal-based saving plan is and how you can develop one for yourself in easy steps.
Goal-based saving is a strategic approach to managing your savings to achieve specific financial objectives. Instead of simply saving money without a clear purpose, goal-based saving involves identifying your financial objectives, determining their timeframes, and then designing a plan to save accordingly.
To create a goal-based saving plan, you need to set specific financial goals, like saving for retirement or a child's education, and create a plan to achieve them.
Goal-based saving offers several benefits. Firstly, it provides clarity of purpose, helping you focus on your saving strategy and make informed decisions. Secondly, it encourages a long-term focus, which increases the likelihood of achieving them.
Thirdly, goal-based saving allows for better alignment with your values and priorities, ensuring that your savings reflect your financial needs. Lastly, it helps you avoid impulsive decision-making as everything is mapped out from the start.
Saving money can be challenging when you don't know what you are saving for. To address this, consider creating a list that outlines all the specific things you want to save money for and determine the amount required for each purpose.
Take a moment to think about your goals. Whether building an emergency fund, going on vacation over the holidays, or buying a car, you will need to save money to actualize your goal.
Outlining your savings goals allows for more effective planning, helping you stay on track and prevent losing sight of your objectives. With clearly defined goals, you can maintain focus and steadily progress toward achieving each milestone.
After you have made a list of all your saving goals, you will notice that saving for each one simultaneously might prove difficult. Therefore, depending on what's most important to you and your family, you might have to prioritise your list. Prioritisation allows you to save for vital goals while ensuring you have enough money to fund your lifestyle.
To get started with prioritisation, you need to categorise your list of saving goals into needs, wants, and wishes. This will allow you to group them in order of importance and urgency. For instance, building an emergency fund and retirement nest egg will be classified as needs; home and car purchases as wants; and dream vacations as wishes.
You can also prioritise depending on your saving time horizon, i.e., when you need to use the money. You do this by grouping your goals list into short, medium, and long-term. For instance, saving for a new washing machine for the next year is short-term, saving for a house downpayment for six years medium term, and saving for your child's college fund is the long-term goal.
Knowing and categorising your objectives is just the start when creating a saving plan. You need a structure that will help you track and achieve each goal. You need to set S.M.A.R.T. goals.
S.M.A.R.T. stands for Specific, Measurable, Achievable, Realistic, and Time-bound goals. It is a goal-setting system that helps you achieve your objectives by forcing you to be concrete, focused, and accountable.
Here’s how to set S.M.A.R.T. saving goals:
Read Also: 7 Reasons Why You Should Start Saving Now
Part of having a goal-based saving account is deciding where to save your money depending on your specific saving goal. Different goals will require different saving products. For instance, where you save your emergency funds will likely differ from where you save your retirement funds.
When creating a goal-based saving plan, you have a wide range of choices regarding where to deposit your money. You can choose from traditional savings accounts, fixed deposit accounts, money market accounts like MMFs, Saccos, etc.
The product you choose will depend on your savings time horizon, the returns you want (interest rate), risk tolerance, and how accessible you want your money to be. When choosing an account, compare different providers and choose one that matches your needs.
Part of having a goal-based saving plan is ensuring that you don’t dig into your savings before reaching your goal or failing to meet your monthly saving target. The main cause of this is typically a lack of emergency preparedness. If you have unexpected expenses or run a budget deficit, you will be forced to use your savings.
The best way to prepare for the unexpected is to build an emergency fund. This will prevent you from having to dip into your savings or take a loan when you have a medical emergency or lose your income. The funds should be enough to cover six to twelve months of your living expenses and should be kept in a safe and accessible place.
Goal-based saving involves setting specific financial goals and planning to achieve them through regular saving. It is, therefore, imperative that you have a strategy that will ensure you are saving money consistently in order to achieve your goal within a specified timeframe.
To save consistently, you need discipline and self-control, as it is to slip and miss to make your regular contribution. This can lead to a loss of momentum that forces you might eventually give up before reaching your goals. To avoid this, you need to incorporate two personal finance rules of thumb in your strategy:
To achieve your savings goals; you need a plan and a way to measure your progress. Tracking your savings involves monitoring your savings to ensure you are on track to achieve your goal within the specified timeframe.
Savings tracking brings organisation to your financial journey. When you keep tabs on your savings, you'll always know how close you are to reaching your goal. You can estimate the remaining time required and identify any lack of progress. It ensures you stay motivated and focused on your goals.
Finally, tracking savings enables you to be aware of your spending habits. You can adjust your spending, savings rate, or goals as needed. For instance, if you notice you lacking behind, you can cut your spending to catch up. Or when your income increases, you can equally raise your saving rate.
Goal-based saving is a powerful strategy for achieving your financial aspirations by ensuring you work towards specific objectives and has multiple benefits. As you create your plan, you should avoid pitfalls associated with a goal-driven plan, such as focusing on short-term goals, being overconfident, and having unrealistic expectations. To succeed, ensure that your plan mirrors your financial situation.
Finally, remember to stay adaptable. As circumstances evolve, it may be necessary to revise goals by reevaluating timelines or adjusting savings targets. This flexibility allows you to stay on course and maintain a proactive approach to achieving your goals.