How to Optimize and Achieve Your Savings Goals for the Short-, Mid- and Long-Term
Reading time: 5 Minutes
By Eric Roberge
February 13th, 2019
You likely have a lot of financial goals. With a lot to accomplish—seemingly all of it complex—things can get overwhelming, fast. But by taking a few simple steps to organize your cash into the appropriate savings vehicles, you can achieve your goals while keeping things easy to manage.
Here are a few tips that will help optimize your strategy for your short-term, mid-term and long-term goals, from what you want to achieve next year to a life goal that might be 30 years down the road.
How to Optimize Your Short-Term Savings Strategy
Short-term usually refers to what you want to accomplish in the next 12 months to 3 years. That might include saving up for a car or home down payment, taking an adventurous vacation or making a big purchase like a boat.
Your goal should be to maximize the return on your savings, while maintaining liquidity, and that means either using a bonus rate savings account or a money market account. These accounts offer higher interest rates, meaning you'll be able to achieve your savings goals faster and more cheaply. To maximize your return, follow these simple steps.
- Leverage your existing assets. You probably already have an emergency savings fund of between six and nine months worth of expenses. Make sure your emergency fund is in a bonus rate savings account, which offers additional returns for higher minimum balances and/or regular monthly deposits. And if you've got multiple savings accounts, now's the time to consolidate them into one high performing account, to maximize your balance and qualify for bonus interest rates.
- Set up automated contributions from another account to your bonus rate savings to reach your savings goals. This ensures you're earning that bonus interest rate every month and will reach your savings goal according to your timeline.
- Consider a money market account, if your goal is more than a few months out and you want to earn a slightly higher return on your cash. A money market account will usually require a certain minimum balance, and offers tiered rates so you'll continue to get better returns as you consolidate and grow your balance.
How to Optimize Your Mid-Term Savings Strategy
When it comes to mid-term goals, you have a longer time horizon between now and when you want to achieve your goal. Think about things you want to accomplish in the next 3 to 10 years. That could include starting a business, funding a child's college education or completing multiple home renovation projects to increase the value of your property.
Since you have a longer window of time to save, you can either give up liquidity or take on some risk, in exchange for a greater rate of return. Consider using either a time deposit account (TDA) or a brokerage account, each of which will allow you to bump your return in one of these two ways:
- Give up liquidity in exchange for a higher interest rate. If you already have a lump sum of cash that you'd like to stash away for between 1 and 5 years, and you have a goal with a hard, predictable deadline, you might consider a TDA, often called a certificate of deposit (CD). You likely won't be able to make regular contributions to a TDA, and you can't take money out until it matures (usually 3 months to a few years, depending on the TDA you choose). But a TDA will likely offer a better rate of return than a savings or money market account, without subjecting your money to risk like it would face in an investment account.
- Take on a bit more risk, knowing that you have more time to reach your reward. As a general rule of thumb for asset management, you shouldn't invest money you'll need in less than 5 years. But if your goal's time horizon is 5 to 10 years? Take advantage of the time cushion by considering a brokerage account. You'll likely want a fairly conservative portfolio (perhaps no more than 50 percent stocks), but even a 50/50 asset allocation between stocks and bonds will put your money to work for you and may earn a small return.
How to Optimize Your Long-Term Savings Strategy
For most people, retirement is the biggest long-term goal there is. And to say you need to “save” for it is a little deceptive. Realistically, you don't need to know how to save money for retirement—you need to know how to invest to build and grow your nest egg.
Why? Because if you keep your money in cash and store that in a savings account, your cash will lose purchasing power over time thanks to inflation. Inflation runs at about 3 percent per year, on average, but most short-term savings vehicles will only provide you with a 0 to 2 percent return on that money.
- Put your money to work in the market, and you may earn a significantly higher return.
- Decide on your needs, your ability and willingness to take on risk, and when you want to start using your nest egg to fund your retirement lifestyle. If you're younger and can invest for 30 more years, a more aggressive strategy where you put more cash into equities might make sense. If, however, you're a little older and are closer to when you'd like to retire, a conservative portfolio with more bonds and income-producing funds is likely the way to go.
The “right” way to manage your money—be it cash in a savings account for a short-term goal or assets you invest for the long-term—will depend on your specific financial situation. It's a good idea to reach out to a professional and talk through those details, to get a specific recommendation on what's best for you and your goals.
Eric Roberge is a financial advisor and CFP® who helps 30-somethings use money as a tool to live well today while planning responsibly for tomorrow.
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