You can save money more efficiently if you develop a written plan, use an interest calculator, and know in advance how much you need to set aside each month or week to reach a savings target to pay for whatever you want.
For example, do you want to save enough money over several months or years to pay for a special event like a major vacation, a college degree, a wedding, or a new vehicle? People have all kinds of financial goals, some short-term, some long. Plus, their targeted savings amounts vary greatly, from less than $100 on the low end to many thousands of dollars.
Here are the general steps for turning your savings dreams into reality.
Make a General Plan to Save Money
Decide what you are saving for and write down a general plan to get started. For instance, if you want to buy a used car for cash, research prices and acceptable models to get an accurate idea about how much money you’ll need. Perhaps you realize that the kind of car you want will cost $8,000, and you want to purchase it in 36 months. Take a look at your budget and include a set-aside amount from every paycheck.
Regardless of what you’re saving for, it’s imperative to know how much time you have, how much money you want to accumulate, and whether you can afford the expense. Buying a new home for cash is probably out of the question for most people. However, financing a vacation two years down the road is often a practical goal.
Use a Compound Interest Calculator
Using a simple interest calculator is, as the term implies, simple. Here’s a good one that lets you put in the primary data and arrive at a result relatively quickly.
To use it, you only need a few figures, like the account’s interest rate where you’ll be putting the deposits, the amount you will deposit at each interval, and the number of contributions from beginning to end.
As an example, which we’ll walk through below, suppose you examine your budget and feel comfortable saving $250 per month for a trip, vehicle, or major appliance. Here are the steps for using the calculator to arrive at a total amount you will have in the account after interest and all contributions are accounted for.
- One: Include a starting balance if you have one.
Realize that many people have a zero beginning balance, but if you have some money in the account already, be sure to put it on the first line of the calculator’s input page. For our example, we will assume a starting balance of $500.
- Two: State the annual interest rate.
Note that sometimes this figure will be an estimate. For savings and CD accounts, though, it’s typically a specific number. For example, assume an annual interest rate of 5 percent for this hypothetical case.
- Three: Enter the compounding frequency.
Keep in mind that you might receive monthly, daily, or annual compounding. Assume “monthly” for our test case.
- Four: Enter the length of time.
This refers to the total number of months, from now, that you will be adding money to the total.
- Five: Enter the payment, whatever it is.
As noted above, we assume a $250 monthly contribution, which will be our “payment” amount.
- Six: Enter “Payment frequency,” which is monthly in this example, meaning you’ll be making deposits of $250 every month for the life of the program.
- Seven: List the start date.
- Eight: Click on “calculate now” when you’re ready and have filled in all the information. If you left something out, enter it now. If you made an entry error, correct it. When you’re done and want to do another calculation, click on the “Reset values” button, and a new page will appear.
In the hypothetical case, where we deposited $250 per month, with a $500 beginning balance, a 5 percent interest rate compounded monthly, and three years of deposits, our final account balance is $10,269.07, which means we can easily buy the $8,000 car we are saving for. So even if inflation causes the price of similar used cars to rise between now and then, we’ll still have more than enough cash to buy one.
Note that in the “Results” panel below the input section, you can see that you made $769 in interest on your monthly contributions and the $500 in the account at the beginning. If you had put the contributions into a cookie jar or safe, you would only have ended up with $9,500 instead of $10,269.