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How to save money for short-, mid-, and long-term goals

At a glance:

  • How to choose short-, mid-, and long-term goals

  • How to save for short-term goals

  • How to save for mid-term goals

  • How to save for long-term goals

  • Summary of saving money for short-, mid-, and long-term goals

  • Practical ideas you can start with today

Setting goals is one of the best ways to take financial responsibility in your life.

By taking the time to consider your life goals and how much savings it will take to reach those goals, you are taking a positive step toward ultimately realizing them.

Without goals, you don't know where you're going and then you can't get there. Even if you have goals, if you don't create a plan to meet those goals financially, it is unlikely those goals will ever be realized.

What are short-, mid- and long-term goals?

When you are setting financial goals, it makes sense to divide those goals into timeframes. A commonly used time frame for goals is:

  • Short-term: goals that you want to achieve within three years.

  • Mid-term: goals that you want to achieve in three to seven years.

  • Long-term: goals that you want to achieve in more than seven years.

Classifying your goals by these timeframes can provide a framework for setting the specific savings goals that you will need to achieve goals in each of these areas. Here are some examples of each type of goal:

Savings strategies

Different types of goals require different savings strategies.

For example, short-term goals such as saving for a vacation require different savings vehicles than a long-term goal such as saving for retirement.

If you are saving for a special vacation, such as an anniversary trip out of the country, or a summer road trip to the beach, you'll want to use a savings account at a bank, credit union or savings and loan to accumulate savings.

That's because you don't want to risk any money that you will need in the next year or two in a longer-term investment such as a stock or bond mutual fund.

For a short-term goal, opening a dedicated savings account and placing a specific amount of money in that account every month is an appropriate approach.

On the other hand, investing in a mutual fund is just the kind of savings vehicle that is appropriate for a long-term goal such as saving for a college education or retirement.

Determining goals

In setting up a savings strategy, it's important to not only decide on your goals but also to categorize them by time horizon.

The best way to go about this is to set a number of goals and then classify them by type.

So, if your goals involve setting up an emergency fund, saving for retirement, replacing your furnace, paying off credit card debt and buying a new car, all those would then be placed in different categories.

Short-term goals would include paying off credit card debt and setting up an emergency fund, mid-term goals would include buying a new car and replacing your furnace, and the long-term goal would be saving for retirement.

Your goals are likely to change as you grow older and your life situation alters.

A younger person may have a long-term goal of saving enough money for a 20 percent down payment on a house, while an older person may already have a home and need to shift the focus to saving for retirement.

Saving for short-term goals

In the midst of bigger financial concerns — paying monthly bills and the extra expenses that seem to come along frequently — prioritizing short-term savings goals can easily slip through the cracks.

Long-term goals can easily take priority over short-term goals, especially since they may be aided helped out by things like an employer match and automatic deduction for retirement.

Many expenses can fall into the category of short-term goals. These include setting up an emergency fund as well as saving for an expensive vacation or paying off a credit card.

One of the best ways to fund short-term goals is by allocating a specific amount of money towards that goal on a monthly basis and placing that money in a savings account or other short-term savings vehicle.

Establishing an emergency fund

Setting up and contributing to an emergency fund is one of the most important short-term savings goals you can work on.

An emergency fund is designed to pay for expenses that are out of the ordinary, that aren't part of your regular budget.

For example, your car payment is part of your regular budget; however, a large car repair might fall under the category of an emergency expense.

Other emergency expenses could include paying your bills if you lose your job, if you experience a health problem that isn't covered by insurance, or if you have to make an unexpected repair to your home.

A rule of thumb for an emergency fund is that it should be at least three to six months' living expenses (some advisors suggest more than that).

So if your regular living expenses cost about $3,500 a month, then your emergency fund should be between $10,500 and $21,000.

Investing and saving for short-term goals

There are a number of investing and saving vehicles for short-term goals.

These include savings accounts, certificates of deposit, and money market accounts. Longer-term investments such as stock mutual funds are not suitable for meeting short-term savings goals.

One of the easiest ways to start saving for a short-term goal is to set up a savings account at your bank, credit union, or savings and loan. You could arrange for a certain amount every month to be transferred from your checking account to this savings account to fund short-term savings.

Other savings options include a money market account or a certificate of deposit.

Some money market accounts require larger balances — such as $1,000 or $2,500, but they pay slightly higher interest rates. With a certificate of deposit, you agree to lock up your money for a period of time — anywhere from three months to five years — in exchange for a higher interest rate.

Maintaining a separate account

Establishing and maintaining a separate account for short-term goals can help you start and maintain the habit of savings.

This way, you'll know that the account exists for that specific goal and then you won't use it for other purposes.

That's usually a more disciplined way to approach setting up accounts for short-term goals than mingling those funds with money for other purposes, such as paying your regular bills.

Or, if you place money designed to meet short and long-term goals in the same account, some money that is designated for one purpose might be used for another purpose, which can defeat the whole point of having goals segmented by time frames.

Saving for mid-term goals

The guiding principles around setting and achieving mid-term goals are similar to setting and achieving short-term goals.

One important key is to set the specific goals that you want to achieve, then decide on how much money you can afford to put toward those goals, then set up an automatic savings and investing plan to fund those goals over time.

For example, if you have a mid-term goal of paying for a new roof that will cost $8,000 and you believe you will need to pay for the new roof in three to four years, you can divide that amount by 36 months (three years), 48 months (four years) or even three and a half years (42 months).

Here's how that would work in terms of the amounts you'd need to save for those different time frames:

It can seem like a lot of money to save for one goal, but remember that while it's ideal to shoot for saving the whole amount, that even some savings is better than none.

For example, if you have so many goals that you can't save all the money you might need for a new roof, you could set a smaller goal at the beginning and build up to saving more, or set a goal of saving half of the amount you'd need to pay for the roof.

Typical mid-term expenses

There are many mid-term expenditures that you could identify and create savings goals around. These include:

  • A new car

  • A new roof

  • Paying off a loan, such as a home equity line of credit

  • Remodeling a bathroom or kitchen

  • Saving for a college education for a child who is in high school

  • Your child's wedding

As with all your goals, it's important to prioritize goals and not set too many; otherwise it can be discouraging and you may not end up saving much of anything for all of those goals.

So you could pick two of the mid-term goals you have — perhaps the most important ones — and make a goal of funding those and reduce your expectations around the other goals or decide not to pursue them.

Choosing a mid-term savings vehicle

There are numerous mid-term savings vehicles that you can choose from to reach your goals.

You will want to use different investing and savings vehicles for mid-term goals 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.

Then, as that child gets closer to college, you could move those funds into a money market or savings account so they won't be subject to as much risk when college is just around the corner.

You can also use some of the same savings vehicles as short-term goals, such as a money market account or certificate of deposit with a term aligned with your goal. A short-term bond fund might also be appropriate.

Saving for long-term goals

Long-term goals are some of the most important savings goals you will work to achieve.

That's because they are very costly, so they require careful planning and consistent savings to achieve them.

Just as with the other time frames, 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 make achieving long-term goals a bit easier.

Types of long-term goals

There are many different types of long-term goals.

Long-term goals can involve expenditures in the tens to hundreds of thousands of dollars.

Retirement is one of the most critical long-term savings goals out there. Because retirement can last 30 years or more, you must have a plan to save regularly to pay for expenses in retirement.

While Social Security is likely to cover some of those expenses, you can't count on it to fund all your expenses.

One advantage of retirement planning is that many employers offer workplace retirement plans such as 401(k) plans and may match some of the contributions you make.

A match is the equivalent to free money, because it is money put into your 401(k) account that you wouldn't otherwise have.

Also, when you contribute to a company 401(k) account, money is typically deducted from your paycheck automatically, which makes it easier to save.

Another long-term goal is saving for college for a child. If you start saving when the child is born, you'll have between 18 and 22 years before you need the money. Saving for a down payment on a home is another long-term goal.

Funding long-term goals

Because long-term goals are so expensive and the time horizon is long, there is a wider range of investing and savings vehicles that are suitable for meeting those goals.

Potential savings and investment vehicles range from mutual funds to savings accounts to certificates of deposit.

As we've mentioned, one great way to fund at least part of your retirement is through a 401(k) plan at work, where you set up an automatic deduction from your paycheck that many employers will match at least part of.

Then, you decide how to invest that based on the menu of investment options that your employer provides. That usually includes money market funds, bond funds, stock funds, funds that include both stocks and bonds, and other types of investments.

If you're saving for a child's college savings account, you can set up a college savings plan through your state's college savings plan or another state's.

Many states allow automatic investment plans for as little as $25 a month and have a wide menu of options.

For other goals, it's simple enough to set up a special savings or investment account dedicated to that goal. If you are saving for a down payment on a house that you want to make in eight years, you could set up an automated savings plan into an investment account such as a mutual fund made of bonds and stocks.

Then, as you get closer to the goal, you could move that into a savings account so you wouldn't lose money if the market went down.

Summary of saving for short-, mid- and long-term goals

Once you've decided what your life and financial goals are, you can attach some timeframe to those goals and begin the process of saving to meet those goals.

Some goals, like retirement, will take years to achieve, while other, more short-term goals, can be accomplished in a year or two.

Now that you understand how important it is to save for you goals, we'd like to encourage you to actually begin the process of establishing goals and putting aside the money so those goals can become a reality.

Practical ideas you can start with today

  • Decide on three goals and determine whether they are short, mid or long-term in nature.

  • Open a savings account to meet one of those goals and deposit some money as part of a regular savings plan to meet that goal.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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