Credit Sesame discusses setting financial goals and how to achieve them.
Sometimes, even with the best intentions, saving for the sake of saving does not happen. You may tell yourself to set aside $100, $200, $500 or more every month but saving is easier said than done. This is especially true if your regular or unexpected expenses eat into your disposable income.
Setting financial goals for a future vacation, a down payment on a home or retirement means getting into the habit of saving money. Sometimes whatever you are saving for is motivation enough to put money instead of overspending in other areas. With a plan, time and clear goals you can achieve your financial goals and develop better habits for the future.
Why is setting financial goals a good idea?
Setting financial goals can help you understand what you really want to spend your money on. These may include short-term goals (new TV), medium-range goals (home down payment), and long-term goals (retirement).
Putting dollar amounts against each goal gives you a figure to save. How much does the TV cost? What is the cost of the ideal vacation? How much money do you need to retire? Adding a target date for each goal allows you to calculate how much you need to save per month. Saving for retirement can be a challenge. Setting up a savings account for retirement is often delayed as it can be difficult for people to envisage financial needs many years in the future. Talking to your financial advisor can help you nail down a solid number.
Preparing for financial success
There are a few actions to set you on the right path to achieve your financial goals.
- Create a family budget. Knowing how much you spend on regular expenses month-on-month is important.
- Automate savings. Even without specific goals, set up a recurring transfer from your checking account to a savings account. This should be for as much as you can afford per month. Set the transfer to happen immediately after your
- Start an emergency fund. Start an emergency fund separately from your savings account and regularly put money in it until you can live for 3 to 6 months without income.
- Eliminate high-interest debt. Interest on credit cards and other loans, especially high-interest rates, can negate savings. Pay off as much debt as you can before saving for your goals.
Making financial success easier
Christmas savings account
A Christmas savings account is a simple example of paying for big expenses by saving smaller amounts regularly over months or years. Workplace credit unions often offer these accounts, where part of your paycheck is automatically transferred for up to a year before Christmas. Even if the interest rate is not high, you are setting aside money almost without realizing it through automatic transfers. It can also help you stick to a holiday budget.
Compound interest accounts
Time allows money to grow through compounding interest. Compound interest is the interest earned on interest and grows over time. Places to put your money for compounding include:
- Savings accounts
- Money market accounts
- Certificates of deposit
- College savings accounts
- Retirement accounts
The U.S. Securities and Exchange Commission gives an example of having $100 in a savings account that pays 5% interest each year, giving you $105 at the end of the first year. At the end of the second year, you have $110.25. Not only did you earn $5 on the initial deposit, but you also earned $0.25 on the $5 in interest.
That extra quarter doesn’t sound like much, but it adds up. If you never add another dime to that account, in 10 years of compound interest it grows to about $162, and in 25 years to $340.
Each goal gets a savings bucket
Each goal can have its own savings account. If you have enough money in your budget, automatically transfer enough money monthly or with every paycheck to fund each goal by the deadlines you’ve set.
However much you save, different savings account for each goal can help ensure money meant for one goal isn’t used for another. Your emergency fund, for example, must not be used to pay for a vacation. This is less likely to happen if the funds are in different accounts.
Find the right places to save
High-yield savings accounts are good places to put your money for short and medium-term goals.
It is possible to find high-interest savings accounts online. Currently, 5% is a good rate. Make sure the account is insured by the FDIC and that your money is liquid, meaning you can withdraw it at any time without paying a penalty.
If you want to hold some money in an account for a set period of time — from one month to 10 years — then you may want to invest in certificates of deposits, or CDs, at a bank or credit union. If you take out the money before the CD matures then you’ll likely have to pay an early withdrawal penalty. CDs are bought with one deposit, and additional deposits aren’t allowed during the CD term.
A CD can be a good place to save for something that’s years away, such as a wedding, home purchase or college.
There are also specific savings vehicles for college (529 savings plan) and retirement (401k or IRA).
Track your progress
Once you’ve started funding your list of goals, track each account’s progress every month and review how you prioritize your goals. You may want to speed up saving for a car if your current car is breaking down a lot lately, and you might need to put off a vacation so you can buy a vehicle faster.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.