Are you paying down student loans but want to save for a down payment on a house? Do you want to take a vacation next winter but know you need to build your emergency fund?
It’s rare to not need to save for multiple goals at once. And, assuming you’re not sitting on a winning Powerball ticket, it’s also rare to have enough money to cover everything you might want. Prioritizing where you put your savings is one of most important financial planning decisions you can make, and there are several potential pitfalls:
- If you grow impatient and try to afford too many things at once, it’s easy to stretch yourself too thin and wind up in debt.
- If you focus too intently on fun goals like trips, cars or home improvements, to the detriment of emergency savings and retirement funds, you may go for years living in relative comfort, only to find yourself behind the ball at an older age.
- Conversely, if you put all of your money towards retirement savings and never spend money on anything for yourself, you run the risk of not knowing how to enjoy any of the money you’ve worked so hard to earn and save.
How you’ll save for multiple goals is, at the end of the day, a deeply personal decision. But that’s what makes it so interesting.
Wants vs needs
Start with this fundamental money question: What are you needs and what are you wants?
You need to buy food, water, clothes, healthcare, and shelter—both today and in the future. Beyond that, the line between want and need can get blurry. But, you could argue that almost anything beyond those basic needs are wants.
Some hardcore financial gurus preach that the only way to save for the big things is to cut out all your wants entirely. Others take a more balance approach and acknowledge that enjoying some of those wants along the way is what life’s all about.
We fall in the latter camp, and believe it’s a more realistic approach. But it is important to realize that these other goals are wants, not needs.
After you’ve taken care of your physical needs (food, shelter, clothing, healthcare), you will divert money to some “societal” needs: Repaying debt or making insurance payments, for example, or purchasing a car that makes getting to work easier, even if one could argue a car is never really a need.
We would, however, definitely include retirement savings in the needs column because you are setting aside money for future needs. In the worst case, failing to save for retirement could leave you struggling to afford even your basic needs later in life.
If you can meet all the above obligations every month, you should feel good about that. You’re surviving within your means. Ideally, however, you’ll build a life that’s about more than surviving. It’s time to consider saving for some of your wants.
What do you want most?
The thing about wants is, you’ll always have more than you can afford.
The secret to being both content and financially secure is to identify which wants are most important to you and which you can do without.
For example, you might be able to eat out five nights a week or save for a down payment on a house, but not both. Affording your own place might mean eating out less.
You might be able to live alone, without roommates, but it would mean traveling less. The question becomes: Which would make you happier?
Of course, you can trim your budget in a whole bunch of ways—lowering your food bill, switching phone plans, cutting cable, and more. But, before you cut something from your budget, ask yourself:
- “How much do I value this?”
- “What else could I do with this money?”
- “Would that bring me more or less happiness?”
Try the Balanced Money Formula (50/30/20 rule)
The 50/30/20 rule says to spend no more than 50 percent of your net income on needs, 30 percent on wants, and 20 percent on savings.
Say you make $3,000 a month— $1,500 of that should go towards your needs—rent, food, transportation, etc. $600 should go into savings (which includes paying off debt), and $900 can go towards your wants.
Obviously, we don’t necessarily live in a balanced world. Sometimes our needs take up more than we’d like them to. If you live in a coastal city, you might spend 50 percent of your income on housing alone. In these instances, it might definitely seem impossible to save for big goals, but that’s when it matters most which plan you decide to go with.
Choosing your saving strategy
To save for multiple goals, you can either try to tackle one at a time or save for all of them simultaneously; it’s just a matter of deciding which strategy works best for you.
Save for one goal at a time
There’s a clear advantage to saving this way—you reach your most important goal faster. The downside, however, is that you might have to defer other more enjoyable goals along the way. For example, if your top saving goal is to pay off your student loans early, you might not be able to take a vacation for a few years if every dollar is going toward your debt payoff.
On the other hand, you might prioritize travel because you’re young and unattached and can save for a trip faster than you can pay off your loans or put a down payment on a home.
You might save for a trip and, when you get back, decide whether to save for another trip or begin focusing on another goal.
With some goals, it may be unclear how much you need to save.
If you need a new car, you could buy a beater for a couple thousand, a luxury car for $40,000 or more, or you could decide you’ll just finance the car and not need to save much of anything. Whether you choose to pay cash or finance, you should figure out how much you can afford to spend on a car.
Finally, saving for a house will likely be your largest and longest savings goal. You’ll have to ask yourself a lot of questions before you even start saving.
- When will you be ready to buy?
- How much house can you afford based on your income?
- How much of a down payment will you need?
These will give you an idea of how much and how long it’ll take you to save. If you’re doing the one goal at a time approach, you might decide to put off your home purchase until you’ve successfully tackled a few other goals first.
Saving for multiple goals all at once
Your circumstances will help govern how you save. If you’re young and unsure of where you’ll end up, saving for a house likely isn’t your main priority.
If, however, you’re ready to move into your dream home and, in the midst of planning out a savings plan, your car breaks down, that’s when you’ve got to start thinking about how to balance multiple goals at once.
To start, you’ll want to put your savings somewhere you’ll get the most out of your money, like a high-yield savings account. Most of these accounts allow you to have multiple savings at once, where you can decide how much you want to dedicate to each.
You’ll find that this method is a little more grueling because It’ll take longer to save for each goal. Here’s where you might want to sprinkle in some small short-term savings goals, so it feels like you’re actually accomplishing something.
Take an envelope and throw a few dollars in there until you have enough to buy some dependable luggage to go with your vacation savings, or do the same for buying a couch for the house you’ll eventually save up to put a down payment on.
Where to put your money
Automatic savings accounts
Automatic savings or investment accounts allow you to save without having to think about it.
If your goals are further out, you might consider investing some or all of your savings. This is where a robo advisor may come in handy. Keep in mind, of course, that investing involves risk. The longer you have to save, the greater potential for increased returns when you invest. The less time you have to save, the greater potential all of your money won’t be there when you need to withdraw it.
Saving actual cash has benefits and drawbacks. For those who like to see physical proof of their progress, using envelopes for savings literally allows you to see how much you have saved up, and in turn, how much you spend if you dip into any of your savings.
Unlike the automatic savings account, you’re responsible for setting aside a certain amount each week or month, so it’s easier to slack.
Given the risk of loss, theft, or fire, we don’t recommend saving cash for your largest goals, but the envelope method is great for smaller savings goals.
Most of us are trying to save for multiple goals at once and sometimes it feels like we’ll never get there. Saving all starts with understanding how to spend our money. Balancing our wants and needs can help us start a simple, easy to follow savings plan.