We're reviving our beloved Asking For A Friend series in partnership with Bank of America® to answer your burning money questions — because there should never be embarrassment in asking how to tackle your financial freedom. Here, we explore how to save for a house and other big milestones.
We most often need financial help during important inflection points in our lives. This inflection point could be many things — a big birthday, a new job, or a realization that we want to take control of our money and investments. Strategizing ways to optimize your financial life and achieve yours goalsisn't always easy, but we've got some ideas on how to make it less daunting ahead, including how digital banking tools can make your life so much easier. Now where do we start?
Do You Have Money Saved?
First, before you can do anything (buy a house, get a dog) you need to ensure you have emergency savings. Emergency savings is not just a clever name — it's money that is defined to only be used when there is an emergency like car repairs, paying a medical bill, or booking a flight for a family matter. This is money that you should only use if you don't have other means to pay for your "emergency." Everyone has a different lifestyle, income, and overhead, so it's hard to determine exactly how much you should have in emergency savings. As a general rule of thumb, you should put aside enough money to cover your expenses for six to nine months. Once you have enough in emergency savings, you can begin to tackle your other goals.
Outline Your Goals
Your additional savings goals are life dependent. For example, if you are looking to buy a home, you want to figure out what kind of home you can afford from a month-to-month basis. This includes not just a mortgage payment but also property taxes, insurance, and upkeep of the home. You also need to be able to afford the down payment which should be 20 percent of the price of the home. Defining your goals can be exciting but also a bit overwhelming. That's why we suggest using resources like Bank of America Life Plan® to help you plan your goals based on your life priorities — whether it’s creating an emergency savings or buying your dream home. Available within Bank of America's mobile and online banking platforms, Life Plan easily and conveniently helps you set and track your goals with just a few taps, access resources, track your progress, adjust when priorities change and receive personalized guidance and recommendations when you need it. Just keep in mind that meeting your goals will not happen overnight.
Complete a Personal Financial Audit
A personal audit may sound scary but in reality it's a deep dive into your finances. How much do you own (assets) vs what you owe (liabilities) — assets minus liabilities equals your net worth. Assets may include cash, savings, retirement accounts, while liabilities might include a mortgage, student loans or credit card debt. You should know your net worth and you should be able to identify areas of improvement by doing this analysis. It's important to understand your own financial landscape and try to identify ways you can immediately improve it.
Tackle Your Debt
If your personal financial audit reveals that you have debt, get a clear picture of what you owe by listing out your debts by creditor, plus the balance, interest rate and monthly due date. Then, you can figure out the best payment strategy. Tackling debt is a whole other article but keep in mind that there are many resources and professionals who can help you manage your debt.
Budgeting Isn't Fun But It's Crucial
Before you can create an accurate budget, you need to see where your money is going. The first part of budget exploration is to distinguish between the "fixed vs variable" costs. Fixed costs are the budget items that don't go away no matter how austere you try to be. Your fixed costs are your housing costs, insurance premiums, car payments, commuting costs, cable, phone bills, etc. Of course, you can get a less expensive apartment, cancel your cable or go on your parents' family plan but at the end of the day, you can't get rid of your fixed costs.
Your variable costs are the costs that you can control. This is where most of the work can be done. First, go through and identify monthly costs like subscriptions and fees. Do you need three music streaming subscriptions? Do you need Netflix, Hulu and Amazon Prime? Evaluate your memberships (gym, clubs) and determine if you are getting adequate value from them. If you think you can eliminate any of your monthly or quarterly subscriptions, you have already "found" some money that you can start diverting towards your savings goals. Remember the distinction between wants and needs.
Outline where most of your discretionary income is going. Is it going to travel, gifts, entertainment, dining out? Dig deep, go back over your spending in the past six months and become fluent in your spending. If you have a partner, talk about ways to reduce your costs together as a team.
Ideally, you have gone through the budget and found that your "cash-in" each month (income) exceeds your "cash-out" each month, at least on a fixed and variable cost basis. If you are cash flow positive, divert that excess cash into your savings or toward one of your financial goals.
Diverting & Increasing Savings
Once you have done the audit and the budget, you know how much money is left over each month. Create a savings plan that will work for you. If you get paid weekly, create a weekly savings budget. If you get paid monthly, a monthly plan may work better.
Next, create a savings account that is distinct from your checking account. Give it a title that identifies your goal to make it less tempting to move the money into your checking account or withdraw the money and spend it.
Then, make sure you track your savings, and go slow and steady. If you determine that you will save $250 per paycheck and, after a month, you don't miss the money you are diverting, consider increasing that amount each pay period — no matter how small! That money adds up over time. Also tell your friends and family about your savings goals. The more people you tell about your goals, the more encouragement you will get. If you have to skip a trip or a night out, you can be honest and tell them that you are trying to save money. Also, if you fall behind on your savings targets, don't give up. Using a personalized resource like Life Plan will help you stay on track as your life priorities evolve and help you make your next best step in your financial journey.
Why Bother Saving?
If you have savings, you can seriously reduce stress. Also, money can mean freedom. When you have money, you can make better decisions about your job situation, your living situation or your general well-being. Relying on digital features like Life Plan can help you set a path to meet your financial goal – no matter how big or small.
Remember that this is your financial journey not anyone else's. You should create a plan that works for you and your individual life priorities. Also, you will not accomplish all of your goals immediately, so remember to be patient with yourself. If you have a partner, make sure you are aligned and on the same track. Schedule weekly family money meetings to ensure that you are both doing the work. Saving money is all about good habit forming so it is much easier to have an accountability partner.
Don't get discouraged. If you go off track, just shake yourself off and get back to it! Rome wasn't built in a day and neither is your wealth!
Bank of America Life Plan is a registered trademark of the Bank of America Corporation. Bank of America, N.A. Member FDIC. Equal Housing Lender.
