Welcome to the fourth week of the Master Your Money Bootcamp on deciding what you want. This week, we’re crunching the numbers!
Exercise 4: Figure out your price tag and your timeline
Saving money for a big purchase or event can seem overwhelming if you start with nothing or very little in the bank.
By breaking down the big goal into a series of smaller ones – such as per paycheck or per month – you can illuminate a path that feels far more achievable.
The goal for this week: Calculate how much you need to save on a regular basis to achieve your goals when you want.
1. Pull out your list of goals from the exercise in week two. These should be prioritized and each should have a target date for when you would like to have the money.
2. Decide on a target number for each savings goal. For example, if your goal is to buy a new car in two years, how much do you want to spend?
3. Plug the numbers into the following formula and repeat for each savings goal:
Target account balance ÷ the number of years until the event or purchase ÷ number of paychecks in a year = how much to save every time you get paid
Here’s an example for buying a new car:
$20,000 ÷ 2 years ÷ 24 paychecks in a year = save $416.67 per paycheck
If your income isn’t regular, use this formula:
Target account balance ÷ the number of years until the event or purchase ÷ 12 months = how much to save every month
For debt payoff, you need to know your minimum payment amount and annual percentage rate (APR). The easiest way to figure out how much you will owe each month is to plug those numbers into an online debt payoff calculator.
For retirement, you need to think about how much money you will need to live on each year – most experts recommend at least 70% to 80% of your pre-retirement salary. Then divide that number by 4% (the standard investment withdrawal rate) to get the target balance needed to retire. Then use an online calculator, which will take into account investment returns, to calculate how much you should save each month. (For a more accurate projection for retirement savings, visit with a financial planner).
4. Once you have the monthly or per-paycheck savings amount for each financial goal, go back to your budget and see where you can free up cash to save. It’s likely that you will need to go back and adjust the target balance or target deadline for some of your goals.
When you work backward – first identifying your goals and then returning to look at your financial situation – you can allocate your cash and figure out what else it might take to hit those future milestones, whether that’s increasing your income or cutting back spending.
Having clear goals in mind and seeing what it takes to achieve them can make some of today’s sacrifices more palatable.
As a reminder, here’s what you’ll accomplish in this month’s Bootcamp (we’ll link to each exercise as it goes live):
For each exercise, you’ll get a detailed explanation of how to complete it and why it’s important. Use the hashtags #MasterYourMoney and #MasterYourMoneyBootcamp to share your thoughts, progress, and connect with others across our Twitter, Facebook, LinkedIn, and Instagram as you make your way through each exercise, then join us for the live events.