Saving a few extra dollars in a savings account each month may not be the best way to plan for different life goals. Savings can be difficult, but it pays off over time.
Creating a plan and making saving a priority can develop habits that will make money work for you. Coming up with a list of financial goals such as a comfortable retirement, a new car, or a down payment on your dream house is generally easy. The bigger challenge is figuring out how to save for them all.
The trick is to think strategically about your goals and write down a savings and investment plan for each one. A little effort today can help make a big difference down the road. Here are some saving strategies for different goals:
Establish an emergency fund
Every family should have a goal which is to establish an emergency fund. Usually, emergency funds consist of saving at least three to six months’ worth of living expenses before you start saving for other goals.
Emergency funds can help you handle serious, unexpected expenses such as a costly car repair or a medical bill. A sufficiently padded emergency fund also keeps you from having to use credit cards or borrow money to pay bills if you lose your job.
The amount you plan to save can depend on your conditions. If you are planning to quit a job without having a new offer, you need to save accordingly to cover your daily expenses including travel when you need to go for interviews. Once you established an emergency fund, you can separate savings for your next priorities into three savings buckets- short, medium and long-term goals. You can begin saving for short-term goals to get into the saving habit.
Savings for short-term goals
There are several investing and saving options for short-term goals. These include savings accounts, certificates of deposit and money market accounts. One of the easiest ways of saving money for a short-term goal is by opening a savings bank account. You could arrange for a certain amount every month to be transferred from your chequing account to this savings account to fund short-term savings.
Once you achieved short term goals, you can plan for midterm goals.
Planning for mid-term goals and expenses
If you wish to save for a down payment to purchase a house or pay for your child’s college education, you need to strategise the midterm goals.
One important key is to set the specific goal that you want to achieve and decide how much money you can afford to put towards that goal. Set up an automatic savings and investing plan to fund these goals over time.
There are a variety of midterm goals and expenses such as buying a new car, house repairs, paying off a loan and saving for a college education. There are various mid-term savings options that you can choose to attain your goals.
You can use different savings and investing options that don't need to be funded for four or five years as opposed to those that have an end-point of two to three years. So, if you are saving for the college education of a child who has just entered high school, you could choose a conservative stock mutual fund or a balanced fund that invests in both stocks and bonds.
You could move those funds into a money market or savings account so they won't be subject to as much risk when the student is about to enter college.
You can also use some of the same savings vehicles as short-term goals, such as money market account or certificate of deposit with a term aligned with your goal, as well as short-term bond fund.
Retirement as a long-term goal
Saving for long-term goals can be quite expensive and time-consuming. You need to look beyond standard banking products to earn higher interest on your savings.
A major example of long-term goals can be retirement. Retirement is perhaps one savings goal where the time horizon is long enough that you can usually ride out market volatility that’s common when investing in stocks and bonds.
Just as with other savings buckets, the best way to achieve long-term goals is to establish a savings and investing plan. There are many types of investments that can help to achieve long-term goals a bit easier.
While Social Security covers some of those expenses, you can’t rely on it completely to fund all your expenses. One advantage of retirement planning is that most employers offer workplace retirement plans, commonly known as 401(k) and match the contributions that you make for your retirement.