How to Save for Multiple Financial Goals
A comfortable retirement. A new car. A down payment on a house. Paying for a child’s college education.
Coming up with a list of financial goals is generally easy. The bigger challenge is figuring out how to save for them all. The trick is to think strategically about your goals and write down a saving and investment plan for each one. A little effort today can help make a big difference down the road.
Here are a few steps you can take as you work toward achieving your goals.
Make a list of all the things you want to save for and how much you’ll need for each purpose. We suggest keeping the list short—if you have 15 different goals, you might struggle to keep track of them. Then, prioritize your list in terms of what’s most important to you and your family.
One way to do this is to group savings goals by needs, wants, and wishes, in order of importance. Saving for retirement will likely be high on the list of needs. And if you haven’t set up an emergency fund to cover at least three to six months of essential living expenses, make that a priority, too. Then, you can add purchases like a bigger home, college tuition, a dream vacation, a new car, or a festive wedding.
Once you’ve listed your goals, it’s time to sort them. The time horizon for meeting each objective is a good place to start. This involves dividing your savings into three buckets: the money you expect to need within the next two years, three to 10 years, or 10 or more years.
Knowing when you’ll need the money can help you decide what sort of investments you should consider as part of your plan. In general, less volatile investments make more sense for short-term goals, as you’ll have less time to potentially recover from market declines. Conversely, you can opt for more aggressive investments for long-term goals, which provides more potential for returns to grow over time.
Take a look at this scenario:
- Bucket 1: Funds for short-term goals, say in the next two years. This could include things like a wedding or nice vacation. Consider traditionally more stable investments, such as cash, money market funds, short-term Treasury bills and notes, or certificates of deposit. By putting money you plan to spend soon into liquid, readily marketable, generally low-risk investments, you can avoid having to sell other investments, such as stock, to raise cash in a down market.
- Bucket 2: Money that you expect to need over the next three to 10 years. This could include goals like a down payment on a home. With a focus on growth and capital preservation, intermediate-term assets like a mix of intermediate-term bonds or bond funds and stocks may make sense for this category.
- Bucket 3: Savings you expect to tap no sooner than 10 years from now, say for retirement or your kids’ college. This category can be invested for growth and income with a larger allocation to stocks.
These categories aren’t one-size-fits-all. Each should be tailored to your risk tolerance as well as your timeframe. And be sure to diversify. You don’t want the fate of your goals hanging on the performance of a single asset.
After identifying your categories, you can start putting money in them. Even modest contributions, when made regularly, can pay off substantially over time. One approach is to commit to investing a set amount toward a specific savings goal on a regular schedule—for instance, every month or every quarter.
Remember, research shows that waiting for the right time to invest is rarely a successful strategy. Time in the market is more important than timing the market, so put your savings—in every bucket—to work as soon as you can.
Also, stick to your priorities. Fund the items at the top of your list first, such as your retirement savings.
You’ll have to do some budgeting to figure out how much to save for each goal. Use one of Schwab’s savings calculators if you need help.
Check on your investments at least quarterly (or more often if you have an aggressive portfolio). In general, you should consider making your allocations more conservative as you approach your goals. Shift away from riskier investments, such as stocks, in favor of more-stable ones, such as bonds. Major life events—a job change, the birth of a child, a marriage, divorce, or death of a spouse—may also call for some adjustments.
Regular reviews also make adjusting your investment easier. For example, if your realize that you’re not saving enough in a college fund as your child grows older, you might cut back your spending, increase your regular contributions, or (if you have more time to reach your goal) shift money into more aggressive assets that may generate higher returns.
Remember that you may need to rebalance your portfolio back to your target allocation from time to time. For example, if your stocks appreciate to the point where your stock allocation accounts for a larger share of your portfolio than your target allocation allows, and your bond allocation shrinks, you could consider selling some of the stocks and buying more bonds to bring your portfolio back in line.
Periodic rebalancing can help ensure your portfolio doesn’t drift too far from your target mix of asset classes. Not rebalancing is akin to letting the market decide your asset allocation over time, which can significantly change your exposure to risk.
Finally, stick to your plan. Down markets can be unnerving, but reaching your goals requires a long-term view and a commitment to staying the course through bad times and good.
What you can do next
Saving for multiple goals, like retirement and college, can be challenging. Use our savings calculator to help meet your objectives.
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