Budgeting, saving and investing for your goals.
By Raya Reaves | Raya Reaves is a Finance Coach and Founder of City Girl Savings.
With the start of every year, the focus always seems to be on major goals. Often, it’s pretty easy to set our goals – we just think about what we want out of life. A new house. A new car. A new job. A new partner. But for the goals that require money, it can be difficult to figure out how to successfully save, budget or invest for purchasing.
Despite what you may have learned in the past, there are strategies that can help you reach your short- and long-term goals. Regardless of where you stand financially, you can take these strategies and apply them to whatever goal you’re working towards.
Short-Term Goals: 1-3 years
When setting your goals, it’s important to specify your target date. Any goal with a deadline of 1-3 years is considered “short-term” and will take a different approach than if you were to set long-term goals. Some common short-term goals include having an Emergency Fund (3-6 months’ worth of expenses), contributing to a retirement plan or paying off credit card debt.
Once you have your goal deadline set, you’ll need to determine how much it will cost to reach your goal. Let’s take the example of having an emergency fund. If your monthly expenses are $4500 and you want to have three months’ worth of expenses saved for emergencies, your goal amount would be $13,500 ($4500 x 3). If you want to reach this goal in two years, you’ll need to save $562.50 per month ($13,500 / 24 months).
Your next step is reviewing your budget to see how you can make sure you’re saving your goal amount of $562.50 per month. Your budget should include what money is coming in (your take-home income), what money is going out (your typical bills, expenses and spending) and what’s left over (the amount you can put towards your goals).
If your budget doesn’t show you can afford $562.50 per month, you’ll want to identify what spending can be reduced or determine how you can make more money. Once you’ve confirmed you can afford to contribute the appropriate amount to your goal, open a High Yield Savings Account (a savings account offered through an online bank that pays out more interest than standard banks) and put your monthly contribution there. Track your progress to make sure you’re on track to reach your goal.
Long-Term Goals: 5+ years
When it comes to long-term goals, things like reaching a certain amount for retirement, saving 20% for a down payment on a home or saving for your child’s college education, you can invest your money to reach those goals.
Investing in the stock market is one of the best ways to build wealth long-term, but the key is giving your investments enough time to grow. That’s why investing to reach your longer-term goals gives you the best chance of success. The historical rate of return for the stock market is 8-10% and is inching higher as time goes by. This type of return doesn’t occur with a savings account, CD or anywhere else.
Similar to determining how much you’ll need to save in order to reach your short-term goals, review your budget to see what you can afford to invest towards your long-term goals. Understand that with your long-term goals, your contributions can change as time goes by. Maybe you will make more money. Maybe you will earn an unexpected bonus. This additional income can be invested to help ensure you reach your goal by your desired time frame.
If your long-term goal is to have $1,000,000 in your retirement plan by the time you retire, use a retirement calculator to help you gauge if you’re on track or if you need to adjust your investment amounts to reach the goal. Tools like the e Merrill Retirement Calculator can help.
For other goals you plan to hit by investing your money, try Betterment. They have general investment accounts that can be leveraged as you work towards your goals. Betterment also has a fantastic goal forecaster that tells you what you should be contributing to reach your goal by your desired timeframe. This allows you to adjust your budget accordingly.
Working towards your goals may require a combination of budgeting, saving and investing. Get specific on your goal amount and time frame. This will help you gauge if saving or investing is the best way to go. Then, your budget will let you know what’s possible!
Here’s to setting (and achieving) major life goals in the new year!