How would you like to save $5,000 in one year?
If you’ve seen New Year’s money challenges that go viral on Pinterest, Instagram or Facebook, you may be inspired to improve your finances.
In this article, I’ll reveal my personal method to save more in 2020 and beyond.
Your Guide to Save $5,000 in 2020
I know that the strategies I’m about to share can work for you because I used many of these tips to pay off my mortgage in just two years.
To save $5,000 in a year, there are only seven steps to follow. Let’s get started…
Table of Contents:
- Determine why you want to save $5,000
- Designate a separate bank account for this challenge
- Review your last month’s budget
- Set goals for reducing expenses and increasing income
- Make periodic transfers to your savings account
- Reward your success along the way
- Tell a close family member or friend about your goal
1. Determine Why You Want to Save $5,000
Motivating yourself to save $5,000 or any amount of money is easier when you know the reason why you’re saving.
Here are a few examples:
- Are you trying to save up enough money to buy a car?
- Do you want to set aside funds for a down payment on a home?
- Are you hoping to pay off your student loans faster?
Once you determine your “why,” write it down so you don’t forget it.
Here’s an example: I’m hoping to save $5,000 in 2020 to replace my AC unit, so I’ve jotted down the goal on a Post-it inside my HVAC closet.
That way, I’ll be reminded of the goal every time I open that closet.
2. Designate a Separate Bank Account for This Challenge
After you’ve determined why you want to save $5,000, the second step is to open a bank account specifically for this challenge.
It’s easier to track your progress if you keep the money separate.
I do my banking with CIT Bank and Discover Bank. Both online banks have interest rates much higher than the national average.
Many online banks have no fees or minimums for savings accounts.
Once you set up your new account, chances are your bank will let you give it a custom name like “Save $5,000 in 2020.”
3. Review Your Last Month’s Budget
Now that the organization steps are out of the way, it’s time to set aside a few minutes to review your budget from the last month.
Don’t have a budget? Look over bank and credit card statements instead.
For this review, go through your budget categories one-by-one. Make a note of any categories where you may be able to reduce costs.
Some categories where people tend to overspend include:
- Restaurants & Take Out
- Pay TV
- Cell Phone
- Subscriptions & Memberships
- Miscellaneous Shopping
When I reviewed my budget, I highlighted the following categories: Groceries, Transportation and Subscriptions & Memberships.
Once you’ve listed categories that have room for improvement, keep reading…
4. Set Goals for Reducing Expenses and Increasing Income
The fourth step is all about goal setting. If you’re going to save $5,000 in a year, you only have a few options to do it:
- Reduce expenses
- Increase income
- Combination of both
After all, you’ll need to save $417 a month to reach your 5K goal.
Here’s my suggestion: Set a goal for reducing expenses using the list from the third step, then set a separate goal for increasing income.
I plan to reduce expenses by $4,000 and increase income by $1,000.
To save $5,000 in a year, putting some numbers on paper isn’t enough. You need an action plan. I’m sharing mine to help you create your own.
Michael’s Action Plan: Save $5,000 in a Year
Reduce Expenses: $4,000 in 12 months
- Groceries: Cancel food delivery service, resume twice weekly meal prep and limit store visits
- Transportation: Consolidate trips, limit toll lane usage and take free trolley instead of Uber
- Memberships: Canceled unlimited spin for cheaper ClassPass plan; use $99/annual Beachbody subscription for at-home workouts
5. Made Periodic Transfers to Your Savings Account
Now that you’ve set goals and made an action plan, set up transfers from your checking account to your savings account.
Here are two ways to reach $5,000 in a year (or $417 per month):
- Automatic transfers: Set up recurring transfers every month or pay period.
- Manual transfers: Set up one-time transfers as you make progress in reducing expenses and increasing income.
Automatic transfers are easier, but don’t rule out manual transfers for that reason. They worked for me.
When I was paying off my mortgage in two years, I started with automatic transfers and began adding manual transfers to reach my goal faster.
I found that taking two minutes to log in to my bank account to set up a manual transfer kept me motivated and reminded me of my progress in a way that automatic transfers did not.
Manual transfers may also be best if you’re able to reduce a major expense — like housing — and can make big progress in just one transfer.
I also suggest them for irregular income like side hustles and making money online.
6. Reward Your Success Along the Way
Next up is to reward your success as you work toward saving $5,000 in 12 months. This is a crucial step.
To keep yourself motivated, think of a few ways to celebrate your wins.
Here’s an example: For every month that I transfer more than $417 to my savings account, I’m going to grab tacos at this place that I love down the street. The meal only costs about $12, but I don’t go often because it’s not on my diet. That way, this is really a “treat” in more ways than one. I might even try new restaurants to keep things interesting.
For this challenge, celebrate your success by getting a coffee, catching a movie or some other small reward for every month that you stay on track to save $5,000 in a year.
Here are the monthly savings targets (based on $417/month) if you started this challenge in January:
7. Tell a Close Family Member or Friend About Your Goal
Finally, reaching your goal to save $5,000 in a year or any goal in life is easier with a support system. Talk to a family member or friend.
If you have a partner, have a discussion with them about this challenge.
Obviously, if you have joint bank accounts with someone, you need to be on the same page about your money goals.
If you’re single, I still think it’s a good idea to tell family and friends.
Let the people closest to you know about your plan to save $5,000 in a year, why it’s important to you and how they can be supportive.
I’m also here for support. Throughout 2020, I’ll share updates on my savings progress in my newsletter that goes out the first Saturday of the month.
If you sign up for my newsletter, you can always reply to the email to give me an update on how you’re doing. I read every email.
Good luck with the challenge! I look forward to saving $5,000 in a year along with you — and building a better financial future.
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