Insights & Stories

How to Save Money: Reaching Short and Long Term Goals

Reading time: 4 Minutes

January 14th, 2021

Chalkboard drawing with financial savings goals Chalkboard drawing with financial savings goals

When it comes to managing your money, learning how to save is one of the most important skills you can build. Having money saved up can help you handle unexpected situations, like losing a job, or having your car unexpectedly break down. Savings can also help you reach your goals, whether that's getting a college education or buying a home of your own.

Granted, it can be a challenge to regularly put aside money, especially if your income is limited and it feels like day-to-day expenses are taking up your entire paycheck.

The good news is that anyone can save and that even saving a small amount can make a difference. We've got tips on how to get started saving for a range of different goals—from building an emergency fund to achieving a comfortable retirement—including how much you should be shooting for for each goal.

How to Get Started

A good way to start saving is with a concept called “pay yourself first." This means that, every time a paycheck comes in, you set aside a certain amount and put it into savings, and then use the rest of the money to pay bills or buy things you want.

Many people also find it's easier to save if you have a specific goal in mind. Think about what you're saving for, whether it's a rainy-day fund, a down payment on a home, or just being able to pay for a vacation or other big purchase without stressing about the cost. Knowing how much you want to save, and by when, will help focus your savings efforts.

Some experts recommend opening a separate savings account for each short-term savings goal so you can more easily track your progress and avoid “robbing Peter to pay Paul." But you can also grow your savings in a single account, as long as you keep track of how much is being saved for each goal.

How Much Should You Save?

How much you need to save depends on what you're saving for. Here are some of the most common savings goals, and what you should plan on setting aside for each of them:

Emergency Fund: Most experts agree that having money available for emergencies is an important part of any financial plan. But how much? It depends on your financial responsibilities, your work situation and other factors. In general, though, you should aim to stash four to six months of living expenses in an emergency fund and keep it easily accessible (or "liquid") in a checking or savings account so you can take out the money quickly if you need it.

Retirement: The amount you should save for retirement depends on your life expectancy, the cost of living in your area, and how comfortable a lifestyle you'd like to have in retirement. Typically, it's recommended that people set aside 10 percent to 15 percent of their pretax income for retirement. If you want to get a better handle on how much you'll actually need, you can use a retirement calculator. Experts also recommend aiming to replace around 80 percent of your preretirement income. However much you decide to save, it's a good idea to start saving for retirement as early as you can, ideally in your 20s. The magic of compound interest can really bolster your savings over the additional years.

Saving for Children's Education: Many experts recommend aiming to save a quarter to a third of your child's college tuition while they're growing up. When the time comes to put them through school, you can plan on paying for some of it out of your income while they're in college and financing the rest with federal loans.

Buying a Home: Depending on the type of loan you qualify for, you may need to come up with a down payment between 3.5 percent and 20 percent. And don't forget to estimate the amount of money you'll need for closing costs based on your price range—typically between 3 and 5 percent of the total cost of the home.

Buying a Car: Experts recommend saving enough so you can put down 20 percent on a new car or 10 percent on a used car. Remember, the more money you put down up front, the less you'll have to pay back later, and the less interest you'll have to pay.

Taking the First Step

Even if you've got goals that sounds like more than you can manage right now, remember that saving even a little bit helps, especially over the long run. The first step is to make a monthly budget. Once you've listed out all your expenses, you'll probably be able to spot ways to free up extra money to set aside.

You can also save more money by automating the process, so that the money gets put away every month without you having to think about it.

The important thing is to get started and to make saving a habit, so it's normal to set something aside every month. If you get disciplined about saving, over time, you'll see your money grow, and be one step closer to reaching your goals.

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