While it can seem overwhelming to save for all of your financial goals at once, they are all important, and they each require a different savings and investment strategy.
Short-term financial goals generally run from a few months to five years in duration, while long-term goals extend beyond that. Short-term goals typically include building an emergency fund, paying down debt or buying a new car. Longer-term goals can range from contributing to a child’s college fund to saving for retirement.
Here are some steps you can take to make the planning process easier and to ensure that you don’t overlook any of your important financial goals.
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Define Your Goals
While there are plenty of potential financial goals to save for, not all will apply to you personally. Saving for a child’s college education is a common long-term goal, for example, but if you don’t have any kids, it obviously won’t apply to you. So, the first step in determining how to save for all of your financial goals is to define what they are for you personally.
Divide Them Into Short- and Long-Term Goals
Once you’ve got your goals defined, divide them into short- and long-term goals. This is important because your savings and investment strategies will be different depending on the time frame of your goals.
If you’re building an emergency fund, for example, that’s a short-term goal. And as a short-term goal, you’ll want to keep that money in a conservative, liquid investment, such as a high-yield savings account. Goals that don’t require an immediate need for money but that are still considered short term, such as saving up for a car down payment, can be placed in investments like CDs, which are safe but require you to tie up your money for a few months or more in exchange for a higher yield.
Longer-term goals, such as saving for retirement, may have a multi-decade time span. For these types of goals, you can afford to take on a bit more risk in exchange for a higher potential long-term return. Stocks, for example, are a common investment used for long-term goals.
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Create an Overall Savings Budget
Many financial experts suggest that you should use a 50/30/20 budget to allocate your monthly income. Under this model, 50% of your income should go toward your needs, 30% should go toward your wants and 20% should go to your savings. So, if you earn $5,000 per month, $2,500 should go to your needs, such as your housing expenses and daily bills. About $1,500, or 30%, should go toward your discretionary spending, such as vacations, eating out or hobbies. The remaining $1,000, or 20%, should go toward your savings and investments.
Allocate Portions of Your Overall Budget to Each Goal
Once you’ve calculated your total savings budget, it’s time to allocate portions of the overall budget to each goal. For example, if you’ve got five financial goals and 20% of your monthly income is $1,000, you could allocate $200 to each of those savings goals.
How To Prioritize Your Savings Goals
While in a perfect world you could set aside large amounts of money for each of your financial goals, the reality is that most Americans are working with tight budgets. In many cases, you might have to prioritize one savings goal at the expense of another. If that’s a concern for you, here’s a suggested path to follow.
First, build an emergency fund of at least $1,000. As financial personality Dave Ramsey explains it, this will cover small but common financial emergencies in your life, such as a car repair or medical expense, without driving you into debt.
Next, prioritize your high-interest debt, such as any credit card balances you may have. This is because most credit cards charge over 20% in interest, and that can quickly spiral your debt balances to the point that you can’t save for anything else.
Saving for retirement is usually the next priority. Remember that the earlier you begin saving for retirement, the easier it becomes. If you wait to save for retirement until you are earning more money, say at age 40, you’ll need to sock away about $1,050 per month at an 8% average annual return to reach $1 million in savings by age 65. But if you start instead at age 20, you’ll only need to save about $190 per month, a stark difference.
If you still have money left to save, you can allocate it toward your other goals, such as college education or a home purchase.
Bear in mind that it’s usually best to allocate money to all of your financial goals every month, and to automate those transfers so that you never forget or overlook any of them. But if money is extraordinarily tight and you have to temporarily forgo some of your plans, the usual order of priority is emergency fund, high-interest debt, retirement and then other goals.
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This article originally appeared on GOBankingRates.com: 5 Ways To Plan For Short- and Long-Term Financial Goals