The Simple Way to Save Enough Money for Your Dream Goals
My husband is a bit of a gear-head. In addition to our two practical commuter cars, he is the proud owner of a 1976 BMW 2002 (which is euphemistically known as a "project car") and a vintage 1975 Honda 400 motorcycle (which does run). (See also: Guide to Buying a Used Car)
Despite the fact that we have more vehicles than space to house them, my husband recently told me that he would love to buy a newer, larger, and more comfortable motorcycle so that he could take a big cross-country trip with his friends.
He sounded awfully wistful talking about that potential trip — so I suggested that we start putting money aside now so that he'd have the $6,000 to $8,000 he'd need for a new bike in about three years. Then, he could plan on taking his big motorcycle trip with friends for his 40th birthday in the summer of 2017.
It used to be that our plans for such big expenses would begin and end with the wistful conversation about "wouldn't it be nice?" But these days, my husband and I have figured out a way to plan for big future expenses without feeling deprived now. Here's what we do — and why it works. (See also: Saving Is Easy With the Right Goals)
1. Have a Specific Savings Account for Each Big Expense
The first thing I did to start making my husband's new motorcycle dream a reality was open a savings account for it — which I nicknamed "His Midlife Crisis."
My husband and I have both a traditional checking and savings account with our local brick-and-mortar bank, and over a dozen (linked) savings accounts with online bank Capital One 360 (formerly ING Direct). (See also: Best Online Savings Accounts)
That may sound like overkill, but each and every one of those online savings accounts has a specific purpose. For instance, in addition to the new motorcycle fund, we have an emergency fund, a vacation fund, a new furniture fund, a new car fund, etc. By opening a new motorcycle savings account, we have already motivated ourselves to save for it. That savings account is a tangible indicator to ourselves that we are serious about saving up the money.
In addition, having each of our targeted savings accounts specifically named for each goal we're trying to reach means we are not tempted to dip into an account for anything other than the goal. If we simply had a large savings account with all of the money co-mingling, it would be easy to take money away for other purposes, since it's not specifically tied to something we want. Our mental accounting might allow us to "borrow" from an unspecified savings account without a second thought, but it hurts to think about stealing money from the future motorcycle.
According to Jennifer Saranow Schultz of The New York Times, "the basic idea [of targeted savings accounts is to] create separate physical and mental accounts for each pot of money, making it less likely you'll tap into the funds before you've achieved the set goal."
Having separate, targeted accounts for each one of our future goals means that we are always working toward those goals. It's a lot tougher to forget to save for a goal if you have a specific account named for it.
Of course, it's not enough to have a targeted savings account. You also have to figure out how to put money in it.
2. Make Your Savings Goal SMART
One of the reasons why grand plans fail — from New Year's Resolutions to saving for a down payment for a house — is because of a lack of specificity. You might know that you want to own a house one day, but you don't know how much house you can afford or when "one day" might be. You might spend time dreaming of what your house will look like, but you never actually crunch numbers to figure out how and when to make that dream house a reality. (See also: How to Achieve All your Goals)
If you really want to save up for a big expense, you will have to commit to creating a SMART goal — one that is Specific, Measurable, Attainable, Realistic, and Timely.
In our case, the specific goal is for my husband to purchase a motorcycle within the next three years. While he doesn't know exactly which bike he wants, he has a good sense of what types of motorcycles he likes and finds comfortable to ride and what kind of price range is reasonable. This "research" comes from him spending a great deal of time on gear-head websites and talking motorcycles with friends — which hardly felt like research for him.
Since we know about how much money we'd need to have set aside ($6,000 to $8,000), we can regularly measure our progress as we save up.
Our goal is both attainable and realistic because we are on the same page for it. Both my husband and I are agreed on setting the money aside and know that we are giving up other uses of that money — but that we are not endangering our budget or attempting to save for something that we can't realistically afford. (For instance, while we might be able to swing the purchase of a pony and fulfill one of my girlhood dreams, there is no way we could afford said pony's upkeep.)
Finally, we decided on an end-date of his 40th birthday so that we have something in the not-too-distant future to be working towards.
In particular, we know that we have to each put aside $75 every month in order to have enough saved for both the motorcycle and the costs of the trip as of June 2017.
Once we had set up the savings account, figured out each portion of our SMART goal, and crunched our numbers, it was time to do the real work of saving up: actually parting with the money every month.
But in fact, because we live in the age of automation, this can actually be the most painless part of the entire process. As soon as you know how much money you need to put aside each month, set up an automatic transfer from your checking account to your targeted savings account. That will keep the decision of putting money aside out of your hands — since most of us can't be trusted to make the long-term decisions we want when short-term temptations are staring us in the face. (See also: Setting Up Automatic Payments)
4. Find Extra Cash to Put Aside
Sometimes, however, you might crunch the numbers and realize that at your current budget, it will take you 40 years to save up for your big expense — at which point you might be a little too old to ride a motorcycle.
You could find some ways to earn more money or cut expenses elsewhere in your budget. But my favorite method for increasing savings for big expenses is to stash any savings you see from making smart purchases. Basically, anytime you negotiate a lower rate with your cable company or pick up a pair of shoes for 25% off, you should bank the difference between the sale price and the full price.
This is easier said than done. MP Dunleavy explains that "making sure that 'mental savings' morphs into tangible cash in your account is one area where your brain isn't your best financial friend." Just because you saved $100 on your car insurance doesn't mean that there's an extra $100 in your savings account. The money is entirely theoretical until you actually transfer it.
So how do you spur yourself to make that transfer anytime you "save" money on a purchase or service? As soon as you get the lower price, immediately think about adding the "savings" into your targeted savings account. Once you have mentally added money to your goal account, you'll feel like it belongs there, making it easier to sit down and do the actual transfer at your first opportunity.
The Bottom Line
If you follow this method of saving for big goals, you'll find that big future expenses are really just small monthly expenses that add up over time. Before you know it, you'll have enough money set aside to make your motorcycle wishes and new house dreams come true.
How do you plan and save for big purchases? Please share in comments!