By Kevin Gibbons
Which has more impact on you?
- Getting in shape because you “should lose a few pounds” or…
- So you can fit into those clothes for next month’s trip to Hawaii?
- Putting money away because “you should be responsible and save,” versus…
- Setting aside $100 each month so on May 15, 2019, you and your friends can take that trip to Borneo you’ve been talking about for ten years?
Most of us are motivated by specifics, not generalities. There’s nothing wrong with that. We just have to recognize that fact and use that knowledge to our advantage. With both saving and spending, having clear goals not only makes it more motivating to act with financial responsibility, it also ensures that we end up with what we really want.
Let’s look at Targeted Savings. You could just take a percentage of your paycheck each period and put it in a savings account. Then you use that account for discretionary spending (this is separate from the money you’re putting aside for your long term wealth-building and retirement). That can work on one level. As long as you maintain a balance in that savings account, you are spending less than you are making.
But, there’s a potential that at some point, you run the risk of having “money burning a hole in your pocket,” where you can feel like you should spend that money on something just so it’s not sitting uselessly in the savings account. Or you start feeling the freedom to increase your lifestyle because you have “enough” saved. Or, more commonly, you simply cut back on or raid your savings for mundane purchases because the money is there for the taking.
If you target all your savings, then that money has a purpose. For example, you are going to dedicate $10 each month towards the purchase of that new outfit for your trip next year, $100 goes towards the new car you expect to buy in 5 years and $20 for that special tool that you need for your crafting hobby. Now, every time you think about cutting back on savings or withdrawing that money, you can see exactly how it will impact your goals. Maybe you are willing to postpone that car purchase by 6 months so you can go on that weekend getaway, but now you have to make that conscious decision.
How do you use Targeted Savings? That depends on you. The simplest way is to put your money in a savings account and keep track of the different goals in some sort of ledger. This can either be a spreadsheet or a paper notebook.
- Every time you put money in your savings (use auto-deposit or auto-transfer so it becomes an easy habit) you distribute the total among all your goals.
- Each goal should have a title (New Car, Vacation, Anniversary Dinner), a target saving amount ($5,000 for the car, $1,800 for the vacation, $300 for the dinner) and a completion date (June 17, 2019, May 10, 2018, Feb 15, 2018).
- This type of detail will let you know if your goals are reasonable. If you are saving $100 each month for your trip and you need $1,800 in 3 months, that’s not going to work! You need to either save more, postpone the trip or reduce the expected costs. You can now make those decisions early enough to take the appropriate action.
Targeted Saving feels good. You’re not just “doing the responsible thing;” you are allocating your hard-earned money towards those things you have decided are important to you. As you see those balances build up to the goal values, you can start getting excited about reaching your objectives. When you are making the decision of packing your lunch for work versus spending that $12 at the corner café, you have a clear idea of what that true cost is to you.
Targeted Spending is the second part of this process. You may think that once you have Targeted Saving implemented, the spending takes care of itself. On one level that is correct. When you have saved enough money for your goal, you make the purchase and enjoy life!
However, the other aspect of targeted spending is purposeful spending. When we buy things, we often do so out of habit, a sense of immediate need or even boredom. We’re feeling hungry at 12:30 so we go through a fast food drive-thru.
Targeted Spending means making choices. It means looking at that money or debit card in your hand and really considering your purchase before you make it. Asking yourself “is this purchase moving me closer to my goals?”
This does not mean that you can’t be spontaneous or take advantage of good opportunities. Targeted spending means that most spending should move you towards the goals you have set for yourself and all of your spending should be purposeful and done with clear intent. If you want to spend your money on something goofy, fun or silly, go ahead! As long as you can afford it and have made the conscious decision that is how you want to spend it.
Money is a tool for living our lives. Just like a good mechanic looks through her toolbox for the right tool to perform the task at hand, you can target your spending and savings to use your money to live the life you want.
Kevin Gibbons is the Chief Operating Officer of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past eight years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 450 individuals and families to create Spending Plans.
They also work with financial advisors and their clients doing cash flow planning as well as giving Savvy Living presentations via webinar and in-person to audiences across the U.S.
If you’d like to learn more about how Kevin and Melissa work with clients, visit The Savvy Life’s Programs page.
If you’d like to learn more about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page