Here is a straightforward plan to help you save $10,000. Use it to boost your own savings and meet your financial goals!
$10,000 is a perfect savings goal. It’s a beautiful number. It’s a large amount of money without being unattainable. It’s the idea starting point for your first “big” savings mission. But like most great ideas, the execution is hard part. It’s one thing to want to save $10,000, but how do you actually go about doing it?
Earlier, I was setting some saving goals for 2013 and struggling to get the math to work out. I’m a full-time student and my income from freelance writing is variable. In 2014, I’ll be in school January through April and again September through December, but I’ll be working May through August (and there’s rumours that the the bulk of my second year MBA classes are in the evening to permit us to work September through December too but I’m not sure of that schedule yet). I might or might not find additional scholarship funding to help with my school costs. I’m expecting a fat income tax refund in February/March because of tuition credits and my 2013 RRSP contributions.
ALL OF THE FOLLOWING TABLES WERE MADE WITH NUMBERS, THE APPLE SPREADSHEET PROGRAM
If you are using Numbers on a Mac, you can download the spreadsheet template used in this post by clicking here.
YOU CAN USE THE SAME FORMULAS IN EXCEL
So naturally I turned to spreadsheet programs to work out my life, and I decided the process was helpful enough for me that it might help MAG readers also trying to work out their financial goals and plans.
How to Save $10,000
STEP 1: Choose a Savings Goal – $10,000
My goal is NOT $10,000 – I just selected to save $10,000 because it’s a nice big round number. Since I’ve already accumulated savings, my goal is something different and involves building off financial assets I already have. However, for this post I thought it would make more sense to lay out a plan starting from $0.
Additionally, $10,000 is a such a feel good number. Everyone likes to save $10,000.
STEP 2: Select a Timeline – 2 years
Be careful with this one. It’s easy to get overly-ambitious when you’re drunk on the sheer excitement of having an additional five-figures added to your net worth. You have to be able to separate what you want from what you can accomplish. Everyone would like to save $10,000 in 3 months, but don’t set your timeline to 3 months if your income isn’t high enough to actually get it done. You’ll just end up failing and then you’ll be sad about it, and you’ll come back and blame me and I will be very confused and start to feel guilty, like I had betrayed you somehow, and it won’t end well for anybody.
2 years is a nice timeline. It’s 24 months. It means only $5,000 of savings per year. You can do that.
STEP 3: Decide Where You Want To Save The Money
Ha! Bet you thought I was going to say “determine how much you need to save each month”, but that is actually Step 4. Step 3 is deciding where to put the money. Why? Because not all savings accounts are created equal. If you’re Canadian, you absolutely must be taking advantage of a Tax Free Savings Account. You should also be saving for retirement in an RRSP if your income is greater than $50,000. If you’ve maxed out your TFSA and RRSPs, you can open an unregistered account for other savings.
Essential savings you should have include an Emergency Fund and Retirement savings, so that’s what I chose to use in this example. I suggest keeping your Emergency Fund in a TFSA and Retirement savings in an RRSP.
STEP 3 PART 2: Decide How You Want To Invest The Money
New savers might not be aware that you can hold different kinds of investment vehicles in registered accounts like TFSAs and RRSPs. These vary in risk, return, and accessibility. For the sake of simplicity I executed this example with only savings accounts, but if you wanted my personal opinion on the matter I would suggest keeping your Emergency Fund in a savings account but investing your RRSP in an index mutual fund. If you’re a more advanced investor, you should be investing in stocks/ETFs within both your TFSA and RRSP.
STEP 4: Determine How Much You Need To Save Each Month
This is straightforward math: save $10,000 / 24 months = $417 per month.
BUT! If you’re gawking at $417/mo thinking that’s impossible, there are some loopholes. I started this post explaining how variable my income is, but despite the spotty forecast, there’s a few things I know for sure: I will get an income tax refund in excess of $2,000 before March 2014 and for the months of May through August of 2014 I will be working full-time. I can start making guesses for 2015 too (ie. as of May 2015 I will be working full-time) but as a general rule I try not to guess my income more than a year in advance because there’s a myriad of circumstances that can affect it. It’s much easier to simply take stock of my progress at the end of 2014 and then update the plan for the following year. I encourage you to do the same, otherwise if you’re imagining a big fat raise or inheritance (you awful person, you) in 2015, you’ll be too tempted to slack off in 2014. However, build a table for 2 years anyway so you can always see your end goal and continuously update your progress as you go.
- Set goals for each account: ie. “I want to save $5,000 in my emergency fund and $4,000 for retirement and $1,000 in other savings”.
- Set contributions for each account and just let the money pile up.
For simplicity’s sake, we’ll go with the second one.
Now, if you want to pretend the magic of compounding doesn’t exist, you might be tempted to do something like this:
Which is cool, but as stated before, $417 is a lot to leave your bank account every month, especially if you’re a starving student such as myself. There is a way to make this number less. We know the power of compounding should let us get away with lower contributions, so let’s round down our Savings contributions from $66.67/mo to $50/mo based on optimism and math.
Let’s go ahead and make our first deposits in January 2014.
And our second deposit in February 2014.
Now something cool has happened: we’ve contributed $800 but we actually have $800.46 in our accounts. Yay interest! The easiest way to calculate compounding interest on your savings in order to make accurate forecasts is to build the formula into your table. There is actually a formula that you can use — I know it exists because I learned it in my Accounting class — but if you like math and spend a lot of time working with spreadsheets, you will be able to deduce it into something like this:
Don’t forget!: the interest rate is 1.40% annually, but it’s compounded monthly which is why you have to divide it by 12. Also make sure you adjust the formula in each cell for the interest rate for that account — as you can see, the interest rate on the RRSP savings account is lower than that of the TFSA.
You can then autofill the rest of the table and witness some compounding interest magic:
We see a problem right away: we’re trying to save $10,000 in two years, but we haven’t hit the halfway mark after 1 year. Go ahead and autofill the rest of the table anyway so you can see how much you’re going to come up short:
We’re $272 short of our goal after two years, and that’s even after putting away $400 a month! This is ridiculous! Screw this!
First, stop being so mad, $9,700 is a lot of money! Second calm down and think of times you might be able to add a little more to the accounts. For me, this is when I get my income tax refund in March and when I work full-time next summer. I never like to over-estimate too much, so let’s low-ball this and assume you’re going to get a $1,000 income tax refund in March, and this will let you put an extra $750 in your TFSA and $250 to your RRSP. Go ahead and add this income to these cells in March:
The table will change automatically. Something marvellous has happened:
We’ve now beat our goal by $750! Right on! So you can think that is awesome and keep it, or you can say, “I really don’t want to contribute $400/mo to these accounts” and use this opportunity to reduce it. Let’s cut our extra savings down to $20/mo.
The table will automatically update.
Yay! Now we exceed our goal by $23 and we only have to pay $370/mo in savings instead of $417!
Now let’s pretend we’re in the future and it is February 1, 2014. After a month has passed, I like to delete the formula from the cell of that month and enter a hard number. This ensures that if there are changes to my contributions or interest rates, it will only affect future cells and not my past progress. This is important because you can’t change the past without a time turner and serious magical consequences that will stretch through the ages and across the universe. I always change the font colour to black to indicate that it is a number and not a formula.
And that’s how you save $10,000 and keep track of every minute of it.
I hope you found this helpful because it took a really long time to write..