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One of the most repeated pieces of financial advice I hear is that you should always have a savings goal in mind. Setting a goal is supposed to focus your efforts and help to ensure success. Since I’m saving a significant percentage of my income, I wondered why I am able to have success despite not having a savings goal.
My savings success comes from the fact that I have automated the process. Before my paycheck arrives, sufficient funds are deducted to ensure that I’ll hit the maximum contribution limit to my 401(k). Regularly scheduled transfers to a 529 college savings plan, taxable investment account, and high yield savings account are also in place. The remaining money is sufficient not only to cover my expenses, which I keep to a minimum, but also to build up a little bit each month. When I want to make a purchase, I simply take from this surplus.
Setting a savings goal is useful if you live beyond your means or spend most of what you earn. In those cases, you need to do something to increase your savings and a goal may help. But for those with more discipline who automate their savings, pay themselves first, and keep expenses low, the maximum possible savings occurs even without a specific goal in mind.
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December 17th, 2008 at 9:10 am
I’d argue that by setting up automated payments, you’re essentially setting a goal of saving at least that amount of money each month. You may not be making an explicit goal of saving “X amount” of money, but you are setting a goal for yourself to save each paycheck.
December 17th, 2008 at 10:21 am
@Pete, I agree that automating my finances does set a savings goal of sorts. But I never say, “I’m going to save X dollars until I have enough to buy a car, tv, or whatever.” I don’t set a goal of saving to be able to buy something specific, which is the advice generally given. I’d rather save as much as I can and then just have the money available when I decide to make a purchase. I don’t think that saving up for a specific purchase would help me to save more, since my savings is pretty much maxed out as it is.