What is the best way to save? My partner and I are planning on having a child.... a large amount is needed. (Finance frown)

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Permalink Reply by Chris Ocean on June 29, 2011 at 5:16pm

In short, the best way to save is through conscientious wealth management. This doesn't necessarily mean stockpiling all of your earnings and living in poverty, but there are a few easy systems that you can erect in order to ensure your financial prosperity. Many of the things that I am going to discuss can be found in this book: The Automatic Millionaire (http://www.google.com/products/catalog?q=automatic+millionaire&...). Here I'll begin to explain a very basic, easily adjustable, savings system but I would strongly encourage you to read that book for more comprehensive systems.

 

Before assessing your finances, it's good to set out some financial goals. These goals can be short term, like going to the spa once a month or long term, owning a home in 8 years. Each goal should be associated with a time period. With these goals in mind, we can now begin to decide how to allocate our funds to best serve our interests.

 

Now we will calculate your base, this is the portion of your income which we will call your disposable assets. Your disposable assets are the funds that are not currently committed to any endeavor and are available for use. For this portion of the calculation it is not only okay to overestimate but it is encouraged:

1. Gather one of every bill that you expect to pay monthly (rent, phone, child support, utilities, etc.)
2. Calculate your weekly living expenses (groceries, lunch at work, trips to the strip club, etc.). The easiest way to do this is to account for your daily routine and multiply and then to append the additional expenses of groceries, etc. which occur on a less regular basis.

Take these numbers, calculate the total for a month for long term goals or bi-monthly (pay period) for short term goals. Subtract this number from your expected income for this time period. The new number that you have is your base. For aggressive savings plans I suggest having your direct deposit immediately place 55-75% of your base into your Savings Account and the remaining funds to go into a Checking Account. Life is very unpredictable and sometimes we need more money in a given month and less in others which is why we leave a minimum of 25% in Checking Account in addition to those expected expenses. That additional percentage can be used towards entertainment or any irregular, unforeseen expenses. This is a basic savings plan. I would suggest that you redistribute any unspent money from a given pay period back into your long term savings at least every quarter for your average savings plan but more frequently for an aggressive saving plan. 

 

Remember the goals we discussed before? Estimate the total dollar amount associated with that expense and then divide by the period over which you intend to be saving: for a $240k home in 8 years I would divide $240k by 96 (12 months * 8 years) to find my monthly Savings Goal; I would divide that number by 2 in order to calculate my savings for each pay period. Measure this number (Savings Goal) against the amount being deposited into your savings annually. If the Savings Goal is too high: adjust your savings plan by reducing your monthly expenses or increasing the length of your timeline. Getting a cup of coffee at $1.89 only 3 times a week amounts to nearly $295 annually! Remember what's really important to you and go out there and get it!

 

I have a spreadsheet with all of these calculations built in, but tools such as www.mint.com can also be useful. Feel free to PM me any questions and I'd be more than willing to link you to the spreadsheet. Good luck and I wish you all the greatest of success!

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