Step 4: Set Your Savings and Debt Reduction Goals
Your Initial Financial Plan:
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Print Out The Eight Step Checklist to Keep Track of Your Progress
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Step 1: Calculate Your Financial APGAR Score
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Step 2: Put Together Your "Ow-Ow" (Net Worth) Statement
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Step 3: Prepare Your Monthly Cash Flow Budget
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Step 4: Set Your Savings and Debt Reduction Goals
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Step 5: Project If You're Saving Enough for Retirement
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Step 6: Work Through a Tax Projection (to Avoid Any Surprises Next April 15th)
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Step 7: Review Your Life and Disability Insurance Needs
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Step 8: Have an Attorney Draft Certain Essential Documents
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Reward Yourselves Step 4 is the most difficult of all eight steps. When you complete your savings and debt reduction budget, you deserve (and might need) a glass of fine wine.
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Our S.O.S. for Savings
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Set a reasonable savings or debt reduction goal for the year
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Open a separate account to hold the savings
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Systematically add to the new account or make payments towards each debt throughout the year
Did you know that if you put only $81.50 into a savings account each month, you'd have $1,000 saved at the end of the year? Put away $815 each month and you will have saved $10,000 during the year.
HOW MUCH NEEDS TO BE ALLOCATED TO EACH OF YOUR SAVINGS AND DEBT REDUCTION GOALS?
Once you complete your monthly cash flow budget in Step 3, and have determined your monthly surplus, the next step is to allocate that surplus among your various savings and debt reduction goals. To do so, simply follow these three steps:
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Set your specific savings and debt reduction goals.
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Give yourself a reasonable time frame for meeting each goal.
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From the "Applicable Factors Page", multiply your goal by the applicable factor to determine how much money needs to be set aside on a monthly basis for you to meet each specific goal. (Or Download our Microsoft Excel debt/savings calculator at calculator.xls to make the calculations for you.)
Please note: Allocating your monthly surplus to your various savings and debt reduction goals is the most difficult step of your initial financial plan. You'll probably need to work through these three steps using many different scenarios before being able to finalize your savings and debt reduction budget.
To help you prepare your Savings and Debt Reduction Budget, please view our completed example or print out our blank template. If you have Microsoft Excel, you can download the completed example and the blank template on goals.xls.
Two Examples of Calculating the Monthly Payment Necessary to Meet a Specific Goal
Example 1: How to Calculate the Monthly Payment Needed to Pay Off a Debt
In this example, you owe $12,000 in student loans which you want to pay off in 5 years. The rate of interest on the loans is 8%.
To meet this goal, you'll need to make monthly payments of $243.32, calculated by multiplying the $12,000 owed by the applicable factor of 0.0203 taken from Table 1 of the "Applicable Factors Page" or use our debt/savings calculator at calculator.xls.
Example 2: How to Calculate the Monthly Amount Needed to Reach a Savings Goal
In this example, you are planning to purchase a home in 3 years and need to save $30,000 for the down payment. You plan to invest the money in a bank money market account, and anticipate earning no more than 4% interest on money saved in this account.
To meet this goal, you'll need to save $785.72 each month, calculated by multiplying the $30,000 by the applicable factor of 0.0262 taken from Table 2 of the "Applicable Factors Page" or use our debt/savings calculator at calculator.xls.
Simplify This Step By Using Our Debt/Savings Calculator
Download our (Microsoft Excel) debt/savings calculator at calculator.xls to calculate how much you need to set aside each month to pay off a debt or reach a savings goal.