13. The First Five Savings Milestones

One of the most important tools to master your personal finances is learning the skill of saving. Yes, the simple premise of saving more than you spend is absolutely a skill and mastering it will test you new and challenging ways. Doing so may even help you escape the financial fate of so many Americans today.

In a recent FINRA study 60% of adults (19,000 survey sample) claimed to be anxious about their personal finances with a leading factor being a “lack of assets”.

As you are likely beginning to notice amongst @hioutput blogs, we will discuss the logic behind and practical advice for improving your financial acumen and in this case improving your savings abilities.

Before we get into the practical advice of this blog, one of the first things that I want to make is that it doesn’t take millions or decades for you to begin to feel and realize the effects of a well executed savings plan. If you make it a priority to improve your financial standing and commit yourself to aligning your spending habits to your income you can also begin to feel the impact of financial security.

The following are 5 achievable milestones to reach for to begin your mastery of savings ($ amounts are calculated on roughly $2300 in rent and $3000 in monthly expenses predominantly credit card, please swap these numbers in for your won circumstance these are modeled off of a large metropolitan, no-car lifestyle).

1. Urgent: Save $1,000
2. Critical: Save 1 Months of Rent (~$2,300)
3. Important: Save 3 Months of Expenses (~$15,000)
4. Beneficial: Save 6 Months of Expenses (~$30,000)
5. Desirable: Save 1 Year of Expenses (~$60,000)

So why bother with any of these savings milestones?

1. Urgent: Save $1,000

Cover Unexpected Costs — The most obvious and useful implementation of saving $1,000 is being able to cover unexpected expenses. A car repair, medical bill, flight, or gift are all generally covered by $1,000. Having this amount of money in your bank account will enable you to quickly cover these expenses and have peace of mind that if any of these situations arise you will be able to afford them without derailing your financial plans.

Buy Bulk — An underrated aspect of carrying $1,000 of cash in your bank account is being able to capitalize on bulk deals and offers. Buying a pack of 6 shampoo bottles at once may be cheaper than 6 individual bottles, paying for an annual subscription instead of monthly, or capitalizing on a more you spend more you save deal are all examples of this scenario. Often times if you don’t have excess cash lying around and you are unable to fit the purchase in your traditional monthly expenses then you end up forgoing a long term savings opportunity to maintain your short term budget. As long as you are purchasing things you will use and you have a place to keep them, you should always buy bulk to capitalize on savings.

2. Critical: Save 1 Months of Rent (~$2,300)

Keep a Roof Over Your Head— In the turbulent time that we find ourselves in today, it is not inconceivable that layoffs or bankruptcies could significantly impact your financial future. In the unfortunate cases where this can happen, it is incredibly important to be able to pay your rent to avoid additional complication from eviction. In this case, your other expenses (presumably credit card expenses) can wait.

3. Important: Save 3 Months of Expenses (~$15,000)

Buy Yourself Time to Look For a Good Option— Revisiting the previous scenario where a layoff happens, 1 month of rent coverage does not buy you a significant amount of time to find an equal or maybe better employment option than your previous job. In most hiring cycles which take a few weeks from start to finish, you would be lucky to line up a new job that quickly. Saving 3 months of rent and living expenses gives you the flexibility to maintain your lifestyle and consider a few options instead of being forced into the first available option.

Take Time Off — One of the frictions in my own life is setting aside money to take a vacation and travel and once you have comfortably over $10,000 in savings it is something to consider. Often travel can cost hundreds to thousands of dollars if flights and hotels are required, not having the funds set aside to cover a large portion of this expense can be a considerable friction in planning this type of activity. If you are not paying for a vacation from your savings it is very likely that you will need to take on credit card debt or take out a personal loan to be able to fund your trip. This financial tools can be useful but also can lead to a long, expensive, and drawn out repayment process significantly complicating a period of time used to recharge.

4. Beneficial: Save 6 Months of Expenses (~$30,000)

Gain Control Of Your Finances — Practically, this milestone allows you even more flexibility than the previous stage, but the value of achieving this goal is more about the process and improvements you have made to complete this goal. For example, at this point in your financial journey you are starting to get a good grip on your personal finances. You are now clearly able to delineate between your needs and wants and are coming to terms with the limits of your income. But it more importantly, it has also proved to you that you can commit and execute on your plan over time. Years of commitment to accumulating savings (~2.5 years if you are saving $1,000 a month) is a core part of discipline needed to be successful financially.

5. Desirable: Save 1 Year of Expenses (~$60,000)

Begin to consider the time you can buy — Once you accumulate, 1 year of living expenses your mind will likely begin to shift away from a survival mindset to more of an optionality mindset. If I wanted to I could… go back to school, take time off to travel, quit my job and self fund a small business. The questions fundamentally become less about survival and more about how can I spend my money to be most advantageous to my own plans and aspirations.

In addition to accumulating more money, the advantages here are also psychological. Once you begin to accumulate money and check off the milestones provided, you will begin to transition from a mindset of scarcity and urgency to one of optionality and opportunity. In making this transition, you will not only be able to avoid financial pitfalls, but also take advantage of more and more opportunity which in turn will help you more quickly realize your financial goals.

Now that you know the why behind saving, let’s figure out the how in this next blog.