Saving for the future can seem like an insurmountable hurdle, especially when it seems like you’re just trying to hang on until the next payday. But having long term financial goals is the best way to get to where you want to be in life, even if it feels like you’re just inching toward them.
What should your long-term financial goals be? And how much money should you be saving toward them? Here’s what you need to know.
What Are Long-Term Financial Goals?
Generally speaking, a long-term financial goal is one that you want to achieve in five years or longer. By contrast, a short-term goal might be one that you hope to reach in a year or two, and a mid-term goal might take two to five years.
Typically, the longest-term goal most people have is saving for retirement. Depending on the stage of life you are currently in, you might be thinking of long-term goals such as funding a child’s education or buying a home. Other long-term goals could be buying a vacation home, starting a business or taking a big trip.
How To Save for Long-Term Financial Goals
It’s said that a goal without a plan is just a wish. And since we know that wishes don’t necessarily come true all on their own, it’s critical to make a plan. Here are five examples of long-term financial goals.
1. Create a Budget
Write down how much you spend each month on necessities, like your rent or mortgage, utilities, food, transportation, etc. Then go back over your debit and credit card statements for the last year to see how much you spent on discretionary items, like dining out, gifts, entertainment and so on.
Decide how where and how much you can trim so that you can put money toward your savings goals. Make sure it’s an amount you can live with, because if you’re too strict with your spending you might be tempted to just give up.
2. Start With an Emergency Fund
If you haven’t already started an emergency fund, do this right away. You should have six months’ worth of expenses in a savings account for emergencies. This sounds like a lot, but it’s necessary for two reasons.
First, it will give you the funds you may need if there’s an emergency, such as if your car needs to be replaced or you lose your job. Without an emergency fund, you could find yourself having to pay these expenses with a credit card, which means you’re paying ridiculously high interest.
The second good reason to have an emergency fund is that it gets you in the habit of saving. You’ll probably need to cut back somewhat to sock away that much cash, so you’ll need to determine what’s important to you. Once you do that, you’ll be putting some money into your emergency fund every month.
Once you have six months of savings, you can start putting that same amount of money toward your long-term goals.
3. Eliminate Your Debt
High-interest rate debt, like credit cards, is a big deterrent to reaching your financial goals. If you are carrying a balance on your credit cards, start paying it down aggressively, as soon as you’ve built your emergency fund.
Look at it this way: If you are carrying a balance on a credit card that is charging you 24% APR interest, paying it off is like getting a guaranteed 24% on your money. Who wouldn’t take that deal?
4. Pay Yourself First
When you made your budget, you came up with the amount you wanted to save toward your goals. Treat this amount as you would any other necessary obligation, like your rent or utilities. Pay your savings before you spend on anything that’s not an absolute necessity.
5. Save Your Raises and Bonuses
As time goes on, hopefully you will get increases in your salary, and you may get a bonus or other windfall. When this happens, instead of splurging on a big celebratory purchase, increase your savings amount by at least half of the amount of your raise or bonus.
Prices go up, and you do need to reward yourself some time, so it’s unreasonable to expect that you’ll put 100% of every raise toward savings. But squirrel away at least half, as soon as you get it.
The Power of Compound Interest: Why You Should Start Today
The most powerful savings tool you have is time. The sooner you start saving for your long-term financial goals, the better off you’ll be.
The reason is simple: compound interest. When you put money into an account that earns interest, and you leave it there, you will get interest on the money you deposited. Eventually, you will get interest on that interest, too.
How Compound Interest Works
Here’s an example. Suppose you put $100 in a savings account that earns 5% APY. At the end of the first year, if you don’t put any more money in, you’ll have $105. If you leave it in there for another year, how much will you have? You may say you’ll have $110, but you’ll actually have $110.25. And the year after that, you’ll have $115.76. This might not seem that big, but if you’re continuing to add to your savings, it can really add up.
What Is a Smart Long-Term Financial Goal?
Here’s a pointer on some good long-term financial goals. If you invest $100 every month in an account that earns 5% interest, after 20 years, you would have invested $24,000. But your account balance would be $41,234.30.
In 30 years, you would have invested $36,000, but you would end up with $83,549.49. You would have invested 50% more money, but your account would be more than double the amount.
Why? Because of the magic of compound interest. These examples assume that the interest is compounded daily, which is how most banks do it.
As you can see, the amount of money you save is less important than when you start. The earlier you start, the more time your money has to earn interest for you. Don’t wait until you think you have enough money to start saving. Take small steps towards what you can save today and add to it when you can. That’s the best way to make progress toward your long-term financial goals.
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- Investor.gov. "Compound Interest Calculator."