Saving money is a goal everyone should have, but to be effective, it should encompass more than just setting a few dollars aside in a bank account. You also want to think about your financial goals — both in the short- and long-term sense.
So how can you set up present and future savings goals that can be realistically achieved? Better yet, how can you tell the difference between a short- and long-term goal, then create a budget accordingly?
Believe it or not, it’s easier than you think.
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Understanding Short- and Long-Term Savings Goals
According to the Employee Benefit Research Institute’s annual Retirement Confidence Survey, the majority of Americans have less than $25,000 set aside for retirement. What’s more, a 2014 GOBankingRates poll found three in four Americans don’t even have the $1,000 needed for an emergency fund.
Many people cite financial challenges as reasons for not saving money. A recent GOBankingRates survey of Americans’ 2015 savings goals found that more than a third of respondents think insufficient income is the biggest obstacle to their savings goals. Regardless of why you think saving will be difficult, it’s important to sit down and examine savings goals closely.
One important aspect of examining savings goals is understanding the difference between saving money for short-term expenses and long-term goals.
For instance, many people define their short-term expenses as monthly bills, school clothes and supplies for the children, personal property taxes, car maintenance, vacations, and other costs that must be covered within the next few months.
A long-term expense requires funds about a year or more from now. These expenses might include saving for a child’s college tuition, saving for retirement or saving for a home down payment.
Identifying the time frame for your anticipated expenses helps you determine which are short-term and long-term savings goals, then budget accordingly.
5 Tips for Managing Long- and Short-Term Savings Goals
Once you identify long-term and short-term savings goals, you can begin setting aside money for reaching them.
1. Create a Short-Term Savings Budget
The first step is to create a budget for short-term savings goals. In the budget, you want to identify the income you have coming in each month (salary, bonuses, Social Security), then jot down your monthly expenses (bills, rent, gas, food).
Next, identify your occasional short-term expenses such as school supplies, taxes and other bills that come around regularly, but not monthly. Also, don’t forget to add a buffer for out-of-pocket medical expenses, emergencies, or other one-off expenses, which will ensure you have no financial surprises that could force you to pull money from your long-term savings.
2. Create a Long-Term Savings Budget
The money that is left over can be put toward long-term goals. Begin identifying your long-term savings goals, including retirement, college tuition, car or home purchases and more. Then examine how much time you feel you will need to meet each of your goals.
For instance, if you know you want to purchase a home for $100,000 in five years and you need a $20,000 down payment, you will want to set aside around $350 per month to have enough in your account by your deadline.
3. Open More Than One Savings Account
The next step to getting your short- and long-term savings goals underway is actually having a place to save your money. While you may be able to use one savings account and checking account to manage your short-term goals, it’s good to open different accounts for each of your long-term goals (one for retirement, one for a house, one for college tuition, etc.). You can start by opening more than one or more sub-saving accounts that allow you to easily differentiate between your savings goals.
It’s important that each savings account be restrictive so that you won’t feel tempted to withdraw your money. For long-term savings goals, in particular, it should be especially difficult to access (i.e. harsh penalties for withdrawals and transfers) your money.
Also, take time to explore products banks offer that are specifically tailored for both short- and long-term savings, such as the Coverdell Education Savings Account (ESA) to tuition, Health Savings Accounts (HSAs) for medical expenses and IRA accounts for your retirement goals.
Accounts that offer high interest rates are particularly beneficial because they help you save and grow your money.
4. Set Short-Term Goals within the Long-Term Goals
A way to make sure you stay on track with your savings goals is to set small short-term goals within your long-term goals. For instance, if you want to save $20,000 over the next five years then celebrate each year that you successfully add $4,000 to your account. Making a big deal about your success will help you want to continue to reach your goal.
5. Take Advantage of Direct Deposit
If you are concerned you won’t have the discipline to manually place money into your various accounts, set up your direct deposit so that portions of your paychecks are automatically deposited into their designated accounts.
Additional Tips for Savings Goals
Looking for more ways to achieve both your short- and long-term savings goals? Here are some additional tips:
Use a Savings Goal Calculator
No matter your savings goal — short-term or long-term — a savings goal calculator can help you determine how much money should be saved. For instance, if you plan to retire and live off the funds you set aside for 20 years, you can calculate how much you will need to have saved based on the retirement income you desire each month, quarter, year, etc.
Or if you want to set aside money for your child’s college tuition, you can determine how much you’ll need to set aside each month based on your child’s age, your savings account’s interest rate, your child’s expected profession and the type of school he or she plans to attend.
Use a Savings Goal Tracker
Another great tool to consider is a savings goal tracker. After you’ve set up your budget, you can use a tracker to make sure you’re sticking to your long- and short-term savings goals. Spreadsheets are available that help you isolate the funds you’ve saved then designate appropriately to your predetermined savings goals. If you have a smartphone, there are plenty of apps and sites to help you track your savings as well, such as the popular too, Mint.
Once you take time to differentiate between your short- and long-term savings goals, it will be that much easier to budget your money accordingly. Then all you have left to do is begin setting funds aside to actually meet those goals.
Photo credit: jayneandd