savings

Savings strategies for different goals

Couple's hands holding savings jar © iStock

The economy may be slowly limping back to life, but many American families still find it difficult to sock away money for a new car, college or retirement.

Belt-tightening is always a good way to save money, but you can only take it so far because when you're raising a family, reasons to spend pop up like weeds. And they come in many varieties, such as car repairs, unreimbursed medical bills and unexpected household repairs, to name a few.

U.S. households saved 5.5 percent in January 2015 -- a lot better than 0.4 percent in 2005, but way off highs of more than 10 percent during the mid-1970s.

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But the national savings rate isn't as important as your personal savings rate. Sen. Elizabeth Warren, D-Mass., and daughter Amelia Warren Tyagi, co-authors of "All Your Worth: The Ultimate Lifetime Money Plan," advocate this financial formula for success: Spend 50 percent of your paycheck on the "must-haves," 30 percent on "wants" and use the remaining 20 percent to service debt and save money.

"We've grown so accustomed to spending money that it really is time to take a second look at our budgets and start pulling in the reins a little bit," says CFP professional Kelly Campbell, CEO at Campbell Wealth Management in Alexandria, Virginia.

"What we'll find out is that a lot of people are able to save a lot more money than they ever thought."

So how do you squeeze more money out of an already squeezed family budget? It's a matter of determination and discipline.

How to save for different goals

  • Set up an emergency fund.
  • Save for short-term goals.
  • Establish midterm goals.
  • Don't overlook long-term goals.

1. Set up an emergency fund

Most financial experts recommend that you set aside an emergency fund of three to six months' worth of living expenses before you start saving for other goals.

While this money technically does not go toward any of your short-, medium- or long-term savings goals, it does act as a deterrent to tapping such important accounts as a 401(k) if you lose your job.

The money also helps prevent your family from getting into deep credit card debt.

If both spouses are working and jobs are secure, you could adjust how much you save for emergencies. But you'll need to carefully assess your situation.

The amount you need to save "depends on how long you expect to be looking for work," says CFP professional Judith Ward, senior financial planner with T. Rowe Price in Owings Mills, Maryland.

"Households with just one worker or folks who earn commission may want a little more just because of that uncertainty."

Ward also suggests tracking family expenses by adopting a household budget for the best chance of success in meeting your savings goals.

2. Save for short-term goals

Once you have an emergency fund set up, consider setting up your priorities into three time frames or "savings buckets" -- for short-, medium- and long-term goals.

Say you want to go on a family vacation in two years or buy a car next year. Both would be considered short-term goals, so investments kept in these buckets should be liquid, meaning you should have no trouble withdrawing the money when you need it.

At the same time, you may want to earn a little interest on your money.

Start by determining how much money you'll need and divide by the amount of time you have until you need the money.

For example, if a car costs $5,000 and you want to purchase it one year from now using cash, you'll need to save about $417 per month, not including taxes and registration fees.

Next, you'll have to figure out how you're going to fund this short-term savings bucket.

Keep in mind that with short-term goals, you don't have the time to ride out market corrections. You don't want to lose money, if at all possible.

Campbell says your best bet is to play it safe.

"I think the short-term investor, the one-(year), two-year, three-year investor, has to be thinking the very short-term monies," he says. "Savings accounts, CDs, money markets are going to be safe investments."

Suppose you decide to keep your $5,000 in a high-yield savings account that yields 1 percent and compounds daily. You would end up with about $5,050 at the end of the year.

That would give you an extra $50 that you could apply toward registration fees and taxes, or you could reinvest the money and start another short-term bucket.

A couple of things to note about CDs: Your money will be tied up for a period of time and if you withdraw your money early, you'll likely incur a penalty that will eat into your interest earnings.

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