Saving For Short-Term Goals

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Saving For Short-Term Goals

In the midst of bigger financial concerns—paying monthly bills and the extra expenses that seem to come along frequently—prioritizing short-term savings goals can easily slip through the cracks. Long-term goals can easily take priority over short-term goals, especially since they may be aided helped out by things like an employer match and automatic deduction for retirement.

Many expenses can fall into the category of short-term goals. These include setting up an emergency fund as well as saving for an expensive vacation or paying off a credit card. One of the best ways to fund short-term goals is by allocating a specific amount of money towards that goal on a monthly basis and placing that money in a savings account or other short-term savings vehicle.

Establishing an Emergency Fund

Setting up and contributing to an emergency fund is one of the most important short-term savings goals you can work on. An emergency fund is designed to pay for expenses that are out of the ordinary, that aren’t part of your regular budget.

For example, your car payment is part of your regular budget; however, a large car repair might fall under the category of an emergency expense. Other emergency expenses could include paying your bills if you lose your job, if you experience a health problem that isn’t covered by insurance, or if you have to make an unexpected repair to your home.

A rule of thumb for an emergency fund is that it should be at least three to six months’ living expenses (some advisors suggest more than that). So if your regular living expenses cost about $3,500 a month, then your emergency fund should be between $10,500 and $21,000.

Investing and Saving for Short-Term Goals

There are a number of investing and saving vehicles for short-term goals. These include savings accounts, certificates of deposit, and money market accounts. Longer-term investments such as stock mutual funds are not suitable for meeting short-term savings goals.

One of the easiest ways to start saving for a short-term goal is to set up a savings account at your bank, credit union, or savings and loan. You could arrange for a certain amount every month to be transferred from your checking account to this savings account to fund short-term savings.

Other savings options include a money market account or a certificate of deposit. Some money market accounts require larger balances—such as $1,000 or $2,500, but they pay slightly higher interest rates. With a certificate of deposit, you agree to lock up your money for a period of time—anywhere from three months to five years—in exchange for a higher interest rate.

Maintaining a Separate Account

Establishing and maintaining a separate account for short-term goals can help you start and maintain the habit of savings. This way, you’ll know that the account exists for that specific goal and then you won’t use it for other purposes.

That’s usually a more disciplined way to approach setting up accounts for short-term goals than mingling those funds with money for other purposes, such as paying your regular bills. Or, if you place money designed to meet short and long-term goals in the same account, some money that is designated for one purpose might be used for another purpose, which can defeat the whole point of having goals segmented by time frames.