A teenage relative was uncertain about how to save up for a vacation. He was working part-time while going to school so I helped him chart it out. “You need $2,100 for the trip and have $700 already saved which leaves a gap of $1,420. Since you have a little over 7 months left to save, we divide by 7 and learn that you need to set aside $200 per month, or $100 from your biweekly paycheck.”
When you put your savings schedule into graphical form, you create a right triangle. Starting with zero savings on the left, you slowly accumulate savings over time to your target on the right hand side, the fully funded amount for your goal.
Let me show you how this applies to everything; I’ll use a car as an example. Since everything physical wears out and must be replaced, many elements of a car will eventually need replacing as well. For example, you’ll have financial triangles for tires, brakes, the muffler, along with oil changes and other fluids. But you’ll also have them for the water pump, bearings, clutch, and even windshield wiper blades. (The image above is my attempt at these for a car). Some of these predictable expenses for your vehicle are inexpensive but others are not and need to be saved for so you’ll have the money when you need it. The financial triangle you reach the quickest for a vehicle is fuel and the slowest triangle is the purchase price of your next vehicle. When do you think the financially literate start saving for their next car? That’s correct, just after they purchase their current car. Your vehicle is always wearing out and losing value, and as this happens you need to be replacing that drop in financial value with new money. These financial triangles are all around you – your computer, cellphone, home, vehicles, sports equipment, etc. If you are not funding these financial triangles, then sooner or later you’ll be unable to afford a predictable expense to repair or replace your things.