7 saving strategies for different goals

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No doubt, millions of Americans weren’t prepared to lose their jobs or have their work hours reduced by the economic shutdown brought on by the coronavirus pandemic. It is a life-altering event that invites us all to take a hard look at our savings habits.

The personal saving rate, the amount of income left over after people spend and pay their taxes, was at 17.8 percent for July 2020, according to the U.S. Bureau of Economic Analysis. But the national savings rate isn’t as important as your personal savings rate. One common strategy for saving money is called the 50-30-20 rule: Spend 50 percent on needs, 30 percent on wants and put 20 percent toward savings and paying off debt.

But how do you save more when money is tight? Start by getting a clear picture of your financial situation. Draw up a budget and start tracking your spending. Then, use these seven strategies to save for different goals:

How to save for different goals

  1. Automate your savings.
  2. Set up an emergency fund.
  3. Tackle high-interest debt first.
  4. Save for short-term goals.
  5. Save for medium-range goals.
  6. Save for long-term goals.
  7. Use multiple savings accounts.

1. Automate your savings

Putting your savings on autopilot is an easy way to separate savings from spending money. It’s tempting to spend money after it hits your checking account. Automating your savings will help you avoid that temptation.

Two great ways to automate your savings are:

  • Split up your direct deposit and funnel part of it into a savings account.
  • Set up a recurring transfer from your checking account into a savings account.

Typically, you can take either a percentage of your paycheck or a fixed amount and direct-deposit it into a savings account. You can also set an amount to be moved from your checking account into your savings account and then set the frequency of this transfer.

2. Set up an emergency fund

The common wisdom for emergency funds is that you should save at least three to six months’ worth of living expenses before you start saving for other goals.

The emergency fund is separate from your other savings. It is a ready source of cash for unexpected expenses and a hedge against tapping a 401(k) or other long-term savings accounts.

A sufficiently padded emergency fund also keeps you from having to use credit cards or borrow money to pay bills if you lose your job, need a costly car repair or encounter some other major, unplanned expense.

The amount you should save “depends on how long you expect to be looking for work,” says Judith Ward, vice president and 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.”

3. Tackle high-interest debt first

It’s critical to tackle high-interest debt as quickly as possible because it compounds and grows. The interest you pay is money you could be saving.

One strategy for paying off debt is to zero out the highest-interest debt first. Once you’ve cleared that balance, move on to the debt with the next highest APR. This strategy, called the “avalanche method,” will reduce how much interest you pay over the long run.

Bankrate’s Credit Card Payoff Calculator can help you calculate how soon you can pay off a credit card.

4. Save for short-term goals

Once you have established an emergency fund, separate your next priorities into three “savings buckets” for short-term, medium-term and long-term goals.

Let’s say you want to buy a used car 12 months from now and you plan to spend $12,000. You’ll need to save $1,000 a month, so you must figure out how you’re going to fund this short-term savings bucket.

Savings for short-term goals should be liquid, meaning it should be accessible cash. And there is no time to ride out market corrections, so avoiding losses is important. Kelly Campbell, CEO of Campbell Wealth Management in Alexandria, Virginia, advises playing 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.”

A high-yield savings account can help boost your savings. This would earn you some interest that you could put toward registration fees and taxes on your new car. Or, you could reinvest it and start another short-term bucket.

A few things to note about CDs:

  • After the opening deposit, additional deposits are usually not allowed during the CD term.
  • Your money will be tied up for a period of time.
  • If you withdraw the money early, you’ll incur a penalty that will eat into your interest earnings. No-penalty CDs are an exception.

5. Save for medium-range goals

If your dream is to save for a down payment on a home, your child’s college education or your daughter’s wedding, you’ll need to go beyond belt-tightening and set up midterm savings buckets.

To save for your child’s education, consider using a 529 savings plan as your bucket. These tax-advantaged savings plans work much like a 401(k) or IRA. Your contributions are invested in mutual funds and other investments.

“There are fees and costs associated with each plan, but I think, hands down, a 529 is the best account to use for saving for college,” says T. Rowe Price’s Ward.

Weddings are another large midterm savings goal. The average cost of a wedding is $33,900, according to The Knot’s 2019 Real Weddings Study. Of course, a more frugal wedding can be a joyful event, too, but it’s still smart to plan for a big expense.

Good vehicles for saving cash for a wedding:

If you’re going to fund this savings bucket with a CD, time the maturity date as close to the wedding date as possible. This will prevent you from getting hit with early withdrawal penalties.

With midterm savings buckets, avoid exposure to too much risk. The goal is still to preserve or increase capital.

6. Save for long-term goals

Retirement is perhaps the one savings goal where the time horizon is long enough that you can usually ride out market volatility.

Still, it depends on how long you’ve been investing, how close to retirement you are and what sort of lifestyle you expect in retirement.

Most experts say the only way investors can achieve a comfortable retirement is to invest a percentage of their long-term savings in equities.

“For retirement, you still need to believe in the stock market because you’re not going to make enough to outpace inflation otherwise,” Campbell says.

“We’ve gone through some very tough times in the market before, but the market will recover as it has after every other downturn we’ve ever had.”

An easy way to fund a retirement account is to participate in your employer’s retirement plan, which is typically a 401(k), 403(b) or 457 plan, depending on whether you work for a private employer, a nonprofit or the government, respectively.

Generally, your taxable income will be reduced by the amount you save. If your employer doesn’t offer a plan, look into opening an IRA.

7. Use multiple savings accounts

Having more than one savings account is a great way to earmark your money for different financial goals. This can help you make sure that money meant for one savings goal isn’t being used on another.

If all of your savings is in one account, money meant for your emergency fund might accidentally be used for a vacation, for instance.

Having multiple savings accounts also gives you a clear picture of how you’re progressing toward your different savings goals. If you have $20,000 saved and it’s all in one account, it may be harder to keep track that you have $5,000 saved for an emergency fund and $15,000 for a home purchase.

And because many banks offer savings accounts that feature the same interest rate, no matter how low your balance, you don’t need to put all your savings in the same account to get the highest yield.

Bottom line

It’s possible to save money for emergencies, as well as retirement, education and other goals. But it takes planning — starting with a budget — and discipline.

Building up savings, especially in uncertain times, offers peace of mind and can shield you and your family against a financial crisis.

Libby Wells contributed to an update of this article. 

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