Boneparth recommends doing this for three to six months so you can account for seasonal changes, holidays, and other anomalies. And though he loves a good spreadsheet, he says you can do this however you want; download a budget app, pore over your digital banking records, or put pen to paper—find the method that works best for you.
At the end of Steps 1 and 2, Boneparth says you should have a clear idea of: what you’re saving for, how much it costs, how long you have to save, and how much you can actually save each month. Marrying these elements is key to creating a plan that works for you, he says.
3. Where are you savings-wise?
Let’s say you’ve completed the first two steps, and you’re feeling great. “Hold the phone,” Boneparth says. Have you paid off any debt you have? Are you on top of your bills? Are you paying off your credit card in full every single month? If not, you should focus on handling these necessary expenses before you look to invest in anything new, Boneparth says. If so, keep going.
Next question: Do you have a rainy-day fund—some kind of cash reserve you can turn to in case of emergency? Ideally, you’d have between three and six months’ worth of expenses stored up that you could use if you suddenly lose your job, have a medical emergency, or otherwise need it for something unplanned, according to Jenn Imbeault, a certified financial planner and vice president and financial consultant at a Boston-area Fidelity Investments center. (Not sure how much your monthly expenses are? If you’ve completed Step 2, you should have a clear idea, Boneparth says.) If you don’t have a rainy-day fund yet, focus on saving for that first. If you do, keep reading.
Does your employer offer to make matching contributions to your 401(k), and are you taking full advantage of them? If you’re not, “get the free money,” Boneparth says. If you are, move on to Step 4.
4. How much time do you have?
It’s time to pull out that list of goals you made in Step 1. Are any of these goals just around the corner—less than four years away? If so, investing probably isn’t your best way forward because it takes it could be a while before an investment pays off. You’ll need to squirrel away cash, and do it stat.
Let’s say you want to make a down payment on a house in two years. If you invest that money, you might lose it—and you won’t have a lot of time to make up for the loss; you’d either have to delay your goal, or spend less on it than you’d hoped.
Instead of risking it, you should focus on saving for any financial goal you hope to meet in the next four years, Boneparth says. For example, if you need $100,000 in four years, you should save $25,000 per year ($100,000/four years) or $2,084 per month ($25,000/12 months).
