How Small Savings Can Add Up
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This table will show you how much your savings can build, depending on the amount you salt away weekly and how long you do it. Choose the amount you think you can save from the row across the top. Then, determine how many years you think you could continue saving. The intersection of those two boxes will show you how much you’ll have at the end of your chosen time period –before taxes.
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Call you lenders or look at your latest statements to find the interest rates and monthly payment information you’ll need in order to fill out this simple worksheet.
Creating a Cash Cushion
Before you start figuring out how much to save for the future, you’ll want to squirrel away some money for the present. It’s extremely important to have an emergency reserve fund just in case you suffer an illness, unemployment, or any other financial setback. As a rule, it’s best to keep an amount equal to three to six month’s living expenses in this fund, either in a bank account or a money-market mutual fund. Use the worksheet below to figure out roughly what size emergency fund you should keep.
1.Add up your total annual expenditures. $_____________
2.Add up the amount you spent last year on vacations, gifts, savings, and investments. (this figure represents outlays you could forgo in the event of a financial crisis). $_____________
3.Subtract line 2 from line 1. $_____________
4.Divide line 3 by 4. (this will give you an estimate of your necessary expenditures for three months). $_____________
5.Divide line 3 by 2. (this will give you an estimate of your necessary expenditures for six months). $_____________
Fine-tune your emergency savings to fit your own circumstances. For example, you’ll need to consider your job safety and any misfortunes that could occur that would not be covered by your health and disability insurance. Your emergency fund should be large enough to cover living expenses until your long-term disability insurance kicks in, which might take from two to six months. The reserve also should carry you through any periods of unemployment, so you’ll have to make some assumptions about your employability. If you are a highly paid executive in a slow-growth industry, you may want to keep cash reserves equal to a year’s worth of living expenses. But if your skills are in demand and you have ample insurance, just two month’s worth of expenses may be sufficient.
After you have decided how large your cash cushion should be, use your net worth statement to add up the balances you now have in cash and cash equivalents, such as checking accounts, savings accounts, credit union accounts, money-market mutual funds, Treasury bills, and CDs with maturities of a year or less. The total ought to be at least enough to cover the minimum emergency fund needs you listed on the worksheet above. If not, start growing your cash reserves to cover the shortfall before you begin putting away so-called discretionary savings –money for buying a house, paying for a child’s education, or funding your retirement.
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One Response to “How Small Savings Can Add Up”
I’m always stressing this to my clients. I always like to show my clients how small savings can add up to big money over time:
Save $1 per day = $30 per month = $365 per year
Save $50 week = $200 per month = $2,400 per year
Here are some of the easy savings wins I just accomplished:
Cancelled HBO, which we hardly watch anymore ($10 month / $120 year)
Switched our phone and Internet to Comcast ($40 month / $480 year!)
Reduced our childcare by 3 hours per week ($150 month / $1,800 year!)
By
San Francisco Financial Planner (Who am I?) on Nov 24, 2008