If the Cash Flows Your Savings Will Grow

In my first post for Talent 2 Talent 2a Cash Management we looked at some strategies for increasing income and cutting expenses at a higher level. This naturally flowed into a more targeted overview of the cash flow statement in part 2 Talent 2b Your Cash Flow is King. In this the final installment of our 2nd talent we will look at saving planning and strategies to provide the community with a holistic picture of this talent and move forward in our series.

Setting Goals is Good for the Soul

I have specifically developed an additional resource for this post which is called the Saving Planning Worksheet. This Worksheet is designed to assist you in calculating the current amount of money you will need to put aside to achieve future saving goals. With the assistance of this form and a basic financial calculator you can very quickly see If you are in a savings shortfall or surplus. In the case of a surplus you may be over allocating resources towards meeting your goals and losing potential to invest or consume, so you may want to scrutinize this as closely as possible. If you have a deficit in savings to meet a specific goal, then corrections must be made to your strategy. You could reduce your expected future consumption and future standard of living which is the basis for your saving goal. Alternatively, in case of a deficit you could find additional resources to commit to savings objectives by either increasing your income or reducing your current standard of living to have a higher standard in the future. Let’s say that your objective is to save $12,500 by the end of 2 year 8 months to finance your 40th year anniversary vacation. If 2% compound interest monthly can be earned net of inflation and taxes, and if money is saved at the end of every month, then we can determine that the monthly savings required to achieve this objective is $281.76. Let us now turn to some strategies that will assist in achieving your savings objectives.

You Must Have a Strategy to Win a War

There are several effective strategies that can help you establish good behavior related to savings. I will look at the four that have worked best for me over the years and share some best practices with the community related to these strategies.

• Sacrificing your current consumption for your long terms savings goals such as vacations, education, retirement and large purchases is a difficult undertaking. If you end up exceeding your personal and household savings goals you need to reward yourself for this accomplishment. This will provide an incentive to save extra cash as you know that you can reward yourself with something that you want if you exceed your goal. Make sure to not to be so focused on saving that you forget to reinforce the good behavior you have undertaken with a treat every once and a while.
• In western societies there is a focus on consumer driven consumption and this consumptive and instant gratification lifestyle has a severe negative effect on our savings rate. If you can avoid using credit you will save on interest charges, and this difference can be saved for your longer-term consumption. Whenever you buy on credit you are leveraging your future standard of living for your current consumption. This will eventually catch up to you and impact your capacity to save for your future goals.
• As a rule of thumb, you should consider automatic saving deductions as this will greatly minimize your capacity to conveniently forget or avoid contributing. Generally, we recommend 10% of your take home pay as a base for savings, and by automatically committing this amount every pay into a savings or a non-registered account you are starting towards your goal of financial fitness. There is the added advantage of dollar cost averaging which will allow you to buy into a savings vehicle or low risk liquid investment at various price levels reducing your market risk. You will be surprised how quickly your savings can grow utilizing the dollar cost averaging method, and this does not require you to time market entry which can be tricky for even a seasoned investor.
• Lastly, I can say from personal experience that the largest obstacle that tends to obstruct the achievement of saving objectives is unrealistic goal setting. Having a 30% net income savings goal may expose you to unnecessary financial hardship and cause you to fail to achieve your objectives which may also impact your motivation to continue goal setting. A best practice here is to start small with a goal that is relatively easy to achieve, then this can be adjusted upwards as you accumulate a personal sense of accomplishment in your previous savings successes.

To finish off we can see that the last 3 posts have demonstrated how cashflow management and analysis can assist in accomplishing your savings goals. I personally noticed that when I am organized with goals and have an active strategy I am far more successful in achieving my objectives. So far in the series we have shown that Talent 1 Your Mental State Does Matter is the foundation of all financial strategy and Talent 2 Cash Management and Cash Flow Analysis help money flow directly into your savings. All of this logically flow into Talent 3 Investing, and by going step by step you are giving yourself all the tools necessary for financial success over the long term.