Turning a Savings Goal Into a Monthly Number
A savings goal is a number and a date. On its own it is an intention; divided into a monthly figure it becomes something you can act on. The Savings Goal Calculator does the conversion.
Why the monthly figure is the one that matters
"Save 6,000 for a car by next summer" is hard to act on, because there is no decision attached to it. "Save 500 a month" is a decision you can make once and then automate.
It also tells you immediately whether the goal is realistic. If the monthly figure is more than you have spare, the goal needs a later date or a smaller number, and finding that out now is better than finding it out in month seven.
The arithmetic without interest is just the target divided by the months. 6,000 over twelve months is 500. Over eighteen months it is 334, which may be the difference between possible and not.
What interest changes
If the money sits somewhere earning interest, you need to contribute less than the simple division suggests, because the account does some of the work.
Saving toward 10,000 over five years needs about 167 a month with no interest. At 4 per cent in a savings account, around 151. Over five years the account contributes roughly 1,000 of the total - useful, and not transformative.
The effect grows with time. Over twenty years interest does a great deal of the work; over two it does almost none. Which is the practical reason short-term goals belong in a plain savings account where the money is safe and accessible, and only long-horizon money is worth exposing to anything that fluctuates.
Automate it and date it
Two habits that do more than the arithmetic.
A standing order on payday, into a separate account from the one you spend from. Money that arrives and leaves before you see it is saved far more reliably than money you intend to move at the end of the month.
A named account per goal. Three goals in one pot is one pot, and the first unexpected expense borrows from all three. Separate pots make the trade-off visible, which is the point.
Two things worth being honest about
Inflation. A target set five years out buys less by the time you reach it, so for long goals the number itself should probably grow. Subtracting expected inflation from the interest rate gives a figure in today's money.
And an emergency fund comes first. Saving toward a goal while carrying high-interest debt or with nothing set aside usually costs more than it gains - the Credit Card Payoff Calculator shows what that debt costs in the meantime. Which of those applies to you is a question for your own circumstances, or an adviser, rather than a calculator.
Common questions
What if I cannot manage the monthly figure?
Move the date rather than abandoning the goal. A smaller amount for longer still gets there.
Should I include money I have already saved?
Yes - subtract it from the target first. The calculator takes a starting balance.
Does it matter which day of the month I save?
Only marginally for interest. It matters a lot for whether it happens, so payday is the answer.
Got a target and a date?