How do I plan out my financial goals?

Personal Finance · 15 Jul 2020

You'll often hear that the first step to financial security is to make a plan, but what exactly does this look like? Below, we've taken a look at three of the…

You'll often hear that the first step to financial security is to make a plan, but what exactly does this look like?

Below, we've taken a look at three of the most common budgets and savings plans. Whether you're looking to pay off debt, get to a savings target or make a big purchase, having a roadmap of how to get there can certainly help.

Spending first

This is the way that most people use their money, if they don't have a specific goal. When money comes in, they spend what they need to (or want to) and then save the rest.

The benefit of this is that it means that your bills definitely get paid and you rarely feel stretched, however it can also mean that you might not be left with very much to put away in your savings.

Essentially, it's a short-term strategy to make sure you're okay in the here and now, but doesn't help too much with long-term saving.

Saving first

To flip that model on its head, if you're serious about saving money, then you need to make it a priority.

Instead of spending money as soon as it comes in, your first action should be to put some into your savings. The easiest way to do this is to set up a direct debit so that 10%-20% of your income goes straight into a savings account.

After that, you use your income to pay your vital bills and what's left over can be spent on luxuries.

When people switch to this method of budgeting, they sometimes struggle in the first couple of months, because they realise that the money they have for fun things in life is smaller than before.

However, after a few months, when you see how much your savings has increased, it can all seem worthwhile. If you still need an extra push to get to your goal, taking out a personal loan and using your saving method to make repayments is worth considering.

Some people refer to this method as paying yourself first.

The 50/30/20 budget

This idea for a budget has been around for a while, but it gained popularity when American Senator Elizabeth Warren recommended it in her book All Your Worth: The Ultimate Lifetime Money Plan.

The theory is simple. When you look at spending your money, you should split it into three parts: 50% for your needs, 30% for your wants and 20% for your savings and debt repayments.

In this method, 'needs' are strict. They're things that you absolutely can't do without – mortgage/rent, groceries, gas and electricity.

In 'wants', you put everything that makes your life a bit nicer. Eating out, streaming services, phone bills, most of your clothes, etc.

Then 'savings' is about putting yourself in a better financial situation. This can vary from person to person. It might simply be putting money into a savings account, so that you're in a better position in the future. It might be making loan repayments or paying off credit card debt. It could be paying off an overdraft.

By sticking to the 50/30/20 rule, you'll find that your essentials are covered and you'll be better off in the future. Like with the savings first method, you may find that you've been spending far too much on luxuries, which can take a bit of adjusting at first. But once you learn to spend within your means, you should find yourself spending more wisely and feeling more comfortable with your financial situation.

Tracking your spending

One of the key things that the 50/30/20 method does it that it forces you to track your spending.

This achieves two things. First, it shows you where all your money is going, which makes you ask 'do I really need/want that?' Often, you'll find that the answer is no. Or that you can wait a while. Or you can find a cheaper way to do it.

The other is that it means you know how much money you have available. Rather than spending money that you could be saving because you saw a great deal, you'll know how much is left in the kitty for the month so you can make an informed decision.

Try a no-spend month

If you're looking for a short-term strategy to boost your savings, a one-off 'no-spend month' might be worth a try.

The idea is that you only spend money on absolute necessities in a month – such as paying off your mortgage/rent, making loan repayments and going to the grocery store.

Everything else is a no-no. Take lunch to work, walk or cycle everywhere you go and put all your streaming services on hold.

Some people give themselves a little bit of leniency – for example, having Netflix might take away from the temptation to go out – but the closer you can get to a zero spend, the more you'll be able to spend that month.

As a benefit, you may form some good habits. Spending $10 a day on lunch at work, for example, is about $2,500 a year. If you can get into the habit of making a sandwich and packing an apple every day, that's a huge saving.

Other articles you might like:

Four ways to pay off your personal loan faster

Learning to love your budget

Moving forward in life

We write these articles for you, our Harmoney borrowers, to be, what we hope, are helpful tools. The information, including rates, is current at the time of posting and is designed to be a general guide only. Any advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.

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