One of the earliest pieces of financial advice we receive is to start saving early. Set savings goals and work hard to achieve them. Although it is wise to build your savings account, we often do not give much thought to the next steps after reaching your savings goal. But this begs the question, when can you say you have reached your savings goal? And shouldn’t you set another savings goal once you reach it?
Only you can answer these questions, so it is important to take them into consideration when planning for the future. Here are a few suggestions to evaluate your savings plan and decide what to do once you achieve your goal.
The 50/30/20 Rule for Reaching Your Savings Goal
The first step is to create a plan to reach your savings goal. The 50/30/20 rule is a basic equation for people who do not like or struggle with detailed budgeting. Instead of tracking several categories, this strategy breaks your spending into three main categories: needs, wants, and savings. The actual amounts will vary based on your take-home income.
This simple approach cuts down the time you spend calculating your monthly budget. However, you still need to dedicate some time to sit down and work out the figures. First, you must determine your total monthly income after taxes. From the final amount, allot 50% for your needs. Then 30% can be used for things you want. Then, about 20% should be put towards your savings goal.
For example, let’s say your monthly take-home income is approximately $3,000. That means $1,500 would pay for your daily necessities. Be certain you are only including things you need to survive. This includes expenses for basic necessities like housing, food, utilities, transportation, health care costs, and minimum debt payments. If 30% has been dedicated for your wants, you should have about $900 available to spend. Finally, about $600 would go towards your savings.
There has been some dispute for those who live in places with a high cost of living. If food and housing are more expensive where you live, more of your monthly budget will go to your daily needs. Another point of contention is with the percentages for higher income earners. Some argue 30% is way too much to spend on your wants. While the 50/30/20 rule is an excellent guideline, you may decide to tailor it to your finances to build your savings account or take the next steps after reaching your savings goal.
5 Steps After Reaching Your Savings Goal
1. Evaluate you Budget and Savings Goal
Keeping tabs on your finances and living under stricter spending limits helps you achieve your savings goals faster. After you create a monthly budget, you can also learn to spot negative patterns. Try to find ways to cut unnecessary spending and redirect money to pad your savings account. Those micro-transactions can really add up quickly and work against you.
If you have extra money at the end of the month, double-check your statements to make sure there were no missed payments. However, if you still have money to spend, it is time to create a plan for your next steps after reaching your savings goal.
2. Pay Down Your Debts
Becoming debt free is a common financial goal. If you have a little left over, it could be an opportunity to pay down more on the principle amount owed. There are two approaches towards tackling debt repayment; the Debt Snowball vs. Avalanche methods. Both have been highly successful in helping people become debt free, but perhaps one will be more beneficial to you. The Debt Snowball method pays off the smallest debts first to reduce the number of lenders you owe. However, the Debt Avalanche method takes on the debts with highest interest first. Whichever approach you choose, paying down debt is an important step after reaching your savings goal.
3. Use Your Savings to Invest
Another wise way to secure your savings is through investments. You can use that extra amount to buy shares in mutual funds or open supplemental retirement accounts. If you want to contribute to your family’s future financial security, you could invest in stocks or bonds for your children. With compounding interest and time, small investments can accrue into significant sums of money. When they become of legal age, they could have a large lump sum to help give them a head start in life.
Here are five of the best investing apps you can use to start saving to invest. We included the fees and minimum and what it is best for so that you have a glimpse of what these apps are.
4. Look for New Opportunities
For some people, the next step after reaching your savings goal is to look for new opportunities. Perhaps you decide to splurge a little on yourself or use your savings for something that you enjoy. You could take up a new hobby or try an activity that was previously out of the budget. It could be the perfect time to use the funds to finally take that dream vacation or buy a vacation home at your favorite spot. You could also fund that business venture you have always talked about pursuing. Once you have taken care of all your other financial obligations, it is a good time to look for new opportunities.
5. Secure Your Financial Future
For others, the most practical next step after reaching your savings goal is to secure your future. First, revisit insurance policies to ensure that you are appropriately covered and your loved ones are taken care of. While you likely already regularly contribute to your retirement accounts, you can increase the amount or find new vehicles to supplement your retirement funds as well. Investing in your future is always sound advice.
Furthermore, you may want to secure your family’s financial future. If you are just starting a family or looking for more space, you could use your savings as a down payment on a home. You may also consider opening an account in your children’s name or starting a college fund for them. These are huge expenses later in life, so every bit helps lessen the financial burden.
What to Do After Reaching Your Savings Goal
Although it may still be a pipe dream, you should consider what you would like to do after you reach your savings goal. You cannot be in a constant state of striving for the next goal. It is important to recognize the milestones as they come. This doesn’t need to be anything extravagant, but take time to celebrate your successes along the way.
Finally, something else to bear in mind is: keep saving. There are lots of ways to do this – either by using coupons, cutting back on eating out, using cash back sites, negotiating discounts or plain old thrift.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.