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 or paying off high-interest credit-card debt will likely be at the top of your list. 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. After you've listed the necessities, you can add goals like saving for a down payment on a home, your child's college tuition, or a new car.

Once you've prioritized your goals, sort them by how much time you have to save to meet each objective. This involves dividing your savings into three buckets:

• Bucket 1: Funds for short-term goals, say within the next two years, like a wedding or nice vacation. 
• Bucket 2: Money that you expect to need over the next three to 10 years, like a down payment on a home. 
• Bucket 3: Savings you expect to tap no sooner than 10 years from now, say for retirement or tuition. 

Knowing when you'll need the money will help you decide what sort of investments you should consider as part of your savings plan.

The next step is to start investing. Remember, 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 based on priority—to work as soon as you can.

In general, less volatile investments make more sense for short-term goals. With a less time to recover from market declines, consider traditionally more stable investments, such as cash, money market funds, short-term Treasury bills and notes, or certificates of deposit. These higher quality, generally low-risk investments could allow you to avoid having to sell others, such as stock, to raise cash in a down market.

If you have three to 10 years to save, your investment strategy can focus on growth and capital preservation. For example, you could mix intermediate-term bonds or bond funds—which typically pay a coupon or interest and generally act as a ballast to the portfolio—with stocks, which are more volatile but have a higher growth potential.

For long-term goals, you can opt for more aggressive investments with greater potential for returns. A larger allocation to stocks tends to provide the opportunity for greater growth and income, and with a longer time horizon, you'll have more time to potentially recover losses from market declines.

Keep in mind that you should tailor your investment savings to fit 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.

That said, once you start saving, don't stop. 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. 

Creating a budget will help you figure out how much to contribute to each goal. However, stick to your priorities. Fund the items at the top of your list first, such as your retirement savings.

To stay on top of your goals, you may need to rebalance your portfolio back to your target allocation from time to time. For example, if your stocks appreciate above your target allocation 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 and risk tolerance. In general, you should consider making your allocations more conservative as you approach your goals. Shift away from more volatile investments, such as stocks, in favor of more stable ones, such as cash or short-term bonds. Not rebalancing is akin to letting the market decide your asset allocation over time, which can significantly change your exposure to risk.

Regular reviews also make adjusting your savings strategy easier. For example, if you 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. 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.

Finally, down markets can be unnerving, but remember to not panic and stick to your plan. By taking the steps above, you're accounting for future uncertainty. Reaching your goals requires a long-term view and a commitment to staying the course through bad times and good. If you need extra help or additional support, don't be afraid to ask a financial consultant or wealth advisor.