Key Take Aways
- Understand current expenses with the expense audit before you set savings goals.
- Simplify savings goals into a dollar amount per month using the SMART framework.
- Assess multiple expenses and set SMART expense reduction goals. Here you will find out if the savings goal is realistic; it may need to be reassessed.
- Monitor and assess your actual expenses against your expense goal.
Intro: Set Savings Goals
The ability to set savings goals will help you reduce financial stress and build wealth.
It doesn’t matter what you are saving for, you need goal-setting structure to get there. It could be a trip, Christmas gifts, an engagement ring, a house or retirement.
Not only do you have to set savings goals, but you also need to be able to meet these goals. Otherwise, you will likely fail and quit. The SMART Goal framework allows you to set goals in a way that sets you up for success.
I personally love giving, but the spending that comes with the holiday season makes me grumpy. My grumpiness then makes my family time less enjoyable, and takes joy away from the holiday season. Nobody wants that.
I found a fix. I put aside $80 in Christmas savings every month throughout the year. That is $960 per year that is now available come Christmas time, and I don’t see a hit to monthly savings come holiday time. I enjoy the giving season much more now that I can focus on giving. This specific savings goal brings true value to my life.
There are two ways to meet savings goals – either by increasing income or reducing expenses. Reducing expenses through goal setting will be the focus of this article.
The aim of this post is to help you set savings goals that you can actually meet through expense reduction. Regularly saving money and investing (once all debt is paid down) will put you on the path to financial freedom.
Remember, money saved today generates income and financial freedom tomorrow.
Step 1: Understand Current Expenses
It’s impossible to set a budget and set savings goals unless we first understand our current expenses. An understanding of all expenses allows us to identify the best expense areas to target for a cut.
You can use my expense audit tool to categorize expenses. Most expenses can be defined as habitual, environmental, or material in nature. Check out my article here to understand and manage expenses within these 3 expense categories.
Step 2: Set Savings Goals
Identify the savings goal, equating to the difference between income and expenses for a given period.
Do you want to pay off debt, save for retirement, save for a trip, a house, or invest? You need to identify the amount you need to save and the date that it needs to be available. From here you can reduce your goal into a specific monthly savings amount with some grade 5 math.
The SMART framework can be used to ensure proper goal management, improving the chances of meeting the goal. A SMART goal is Specific, Measurable, Attainable, Realistic and Timebound. Understanding expenses in step 1 is necessary to determine if the savings goal is attainable and realistic.
You can either focus on increasing income or reducing expenses to meet your savings goal. Here I focus solely on expense reduction. Read this article to determine if you should focus on increasing income or decreasing expenses to meet savings goals.
Step 3: Set Expense Reduction Goals
This is great, now you’ve set a savings goal! It’s now time to have a detailed look at expenses from step 1.
First, identify specific non-essential expenses to reduce by a target amount. Use the SMART framework to set the goals for each expense that you are seeking to reduce.
Add up the total savings across the non-essential expenses, and compare the total saving goal identified in step 2. You will likely have to cut a few different expenses to meet the savings goals.
You may realize that it’s not realistic to cut expenses to the degree required to hit the savings goal. This means that your savings goal is also unrealistic and will have to be reassessed. It failed to meet SMART criteria. The approach to expense cutting can be simplified using the approach described in this article.
Step 4: Monitor and Assess Progress
Monthly progress monitoring provides feedback that is necessary to tell us if we are on track to meet our savings goals.
Expense auditing is the way to get this necessary feedback. The results of the audit, our actual expenditures, must be compared to the expense reduction goals set out in step 3. We will then see if we are on track or if we are veering off course.
If we are failing to meet the goal, we have two options: Reassess the goal or step up. It is possible that the goal was not realistic. In this case, the goal must be reassessed.
However, we may simply need to put in more effort to meet the goal. In this case, you need to step up!
Expense reduction goals in step 3 naturally flow from the savings goals in step 2. It is important to stay on point with savings goals to pay down debt, save for big upcoming events, or to invest and grow wealth.