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7 saving strategies for different goals

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Saving isn’t always easy, but it pays off over time.

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? These seven savings strategies can help you save for different goals.

1. Automate your savings

To better organize your savings goals, start by getting a clear picture of your financial situation. Automating your savings is also a smart way to increase 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 helps you avoid that temptation.

Two ways to automate your savings are to split up your direct deposit and funnel part of it into a savings account and to 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 use direct deposit 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 the transfer.

2. Set up an emergency fund

Common advice for emergency funds is to 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 to set aside “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 crucial to tackle high-interest debt as quickly as possible, because the interest added each month to the balance is money you instead could be saving.

A popular savings 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 reduces 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, which include short-, medium- and long-term goals.

Example of short-term goals

  • Car down payment

Let’s say you want to buy a used car a year 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.

  • Vacation

A vacation could easily cost a few thousand dollars, depending on where you are going and how many people are coming along. Adding short-term savings goals can help you afford the vacation you want by saving just a little bit at a time.

Best savings accounts for short-term goals

Both a high-yield savings account and money market account are smart choices for building your short-term savings.

  • High-yield savings account

A high-yield savings account returns a better yield than many standard savings accounts and can help boost your savings. The interest earned could be put toward registration fees and taxes on your new car. Or, you could reinvest it and start another short-term bucket.

  • Money market account

A money market account is another useful tool for saving for short-term goals. Like savings accounts, money market accounts are liquid, which means you have ready access to your cash. Unlike savings accounts, many money-market accounts include checks and/or a debit card, making withdrawals easier.

Certificates of deposit aren’t as liquid as savings and money market accounts. Money deposited into a CD is held by the bank or credit union for a specific period — typical terms are one month to 10 years — and taking the money out prematurely could result in an early withdrawal penalty.

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 child’s wedding, you’ll need to go beyond belt-tightening and set up midterm savings buckets.

Examples of medium-range savings goals

  • Weddings

Weddings are another large medium-term savings goal. The average cost of a wedding is $28,000, according to The Knot’s 2021 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.

  • Down payment on a house

A CD may be of great use here, but you could also tap your individual retirement account for up to $10,000 for a home purchase without incurring a penalty.

  • College

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

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

Best savings accounts for medium-range goals

Good vehicles for saving cash for medium-range goals include:

Whether it is a brick-and-mortar or an online bank, a money market account is a suitable option for saving for the medium. Online banks tend to have a higher yield due to lower overhead, but be sure to check which money market rates are best for your circumstances.

You can earn higher APY with a savings account than a traditional checking account, allowing you to squirrel away funds without the temptation to access them in the short-term. High-yield savings accounts typically pay higher rates than traditional savings accounts, which can help you save more.

Laddering CDs is a common option for savings strategies, helping you fund that down payment for your new home. If you choose a CD, additional deposits are usually not allowed during the CD term after the initial deposit. Your money will be tied up for a specified period, and if you withdraw the money early, you’ll incur a penalty that will eat into your interest earnings. No-penalty CDs are an exception.

If you’re going to fund this savings bucket with a CD, time the maturity date as close to the wedding date as possible to avoid an early withdrawal penalty.

6. Save for long-term goals

Saving for the longer-term often requires looking beyond standard banking products, such as savings deposit accounts and CDs, to earn higher rates of return on your savings.

Examples of long-term savings goals:

  • Retirement

Retirement is perhaps the one savings goal where the time horizon is long enough that you can usually ride out market volatility that’s common when investing in stocks and bonds.

Recommended account for long-term goals

  • 401(k)

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.

  • IRA

If your employer doesn’t offer a plan, look into opening a traditional or Roth IRA. Most experts say the only way investors can achieve a comfortable retirement is to invest a percentage of their long-term savings in equities.

Given current low savings rates, the stock market remains for many households the only option to earn returns that can outpace inflation. And though stock prices may fall — and sometimes drastically — the average return of the S&P 500, a broad measure of stock performance, is more than 9 percent over the last 20 years.

7. Use multiple savings accounts

Having more than one savings account is another way to earmark your money for different financial goals. Having multiple savings accounts can help ensure that money meant for one savings goal isn’t being used for another.

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

Having multiple savings accounts also gives you a clearer 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 offers peace of mind and can shield you and your family against a financial crisis.

Written by
Matthew Goldberg
Consumer banking reporter
Matthew Goldberg is a consumer banking reporter at Bankrate. Matthew has been in financial services for more than a decade, in banking and insurance.
Edited by
Wealth editor