When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house. No matter the stage of life, when you’re trying to make the most of your money, you probably have multiple places to send the cash.
Consider How Much and How Long
When you’re saving for multiple goals, there are several things to consider. For one, you need to know how much money you need. You also need to consider how long you have to save and invest for your goal. This is called the time horizon.
Time Horizon and Investing
The sooner you need the money, the less risky you can afford to be with investments. It’s wise to choose less volatile investments so you won’t risk losing your money in the market just as you need it. A couple saving for a house saves and invests much differently than they do for retirement. But the less risky or volatile your investments, the less money you’ll make on average in the market. This means you have to save more to reach the same target number.
Fund One at a Time, or All At Once?
After you know how much money to target, and when you need it by, you also have to consider exactly how to allocate your extra money to best save for your goals.
Even with multiple savings goals, any of us still save for one big goal at a time. But here’s why that gets tricky: If you’re saving for one goal at a time, you’re always saving for the short term goal. With the short time horizon, you need to be in more conservative investments, and you’ll make less on your investments. This means you’ll need to save more than if you funded your goals differently.
On the other hand, if you save for all your goals at the same time, will you have enough money to save up for your first goal when you need it? And will you be able to afford to save for all your goals simultaneously?
To see the impact, let’s compare a 40-year-old couple with a 12-year-old son. They have multiple savings goals – three to be exact: saving for a house in a different school district, saving for college, and investing for retirement. They’d like to have $30,000 for the house in 3 years, when their son starts high school. They’d like to save $60,000 for college in 6 years. And, they’d also like to retire at the age of 65 in 25 years, with a portfolio of $900,000.
Goal | Time Horizon | Funds Needed |
Buy new home | 3 years | $30,000 |
College education | 6 years | $60,000 |
Retirement | 25 years | $900,000 |
Since each goal has a different time horizon, we’ll assume that they’ll make 1% on money needed in 0-3 years, 4% on money needed in 4-8 years, and 8% on money needed in 9 or more years.
One Goal At A Time
If they save for a home, then college, then retirement, they’ll need to save $9,800 per year for 3 years, then $9,656 per year for 3 more years, and then $28,675 per year for 19 more years. In total, this couple will be saving $593,537 to fund their multiple savings goals one at a time. By delaying their retirement savings, they have to triple their yearly savings after six years. Many of us would have trouble making such a jump. By postponing saving for retirement, they have to save more than they would have otherwise.
All At the Same Time
Compare this to if they save for each goal all the same time. This means that they save $9,800 per year for 3 years for the house, $9,300 for 6 years for college, and $16,500 per year for 25 years for retirement.
You won’t need to save as much for retirement, but it’s a lot of saving in the beginning years of your life when salaries are lower and money is tight. In years 1-3, you need to save a total of $35,600 per year, and years 4-6, you need to save $25,800 per year, and years 7 and onward, you need to save $16,500 each year. That’s a large amount at the beginning, and many families would find it difficult to save twice as much in the beginning as in the end. After it’s all said and done though, you’ll be putting a lot less of your money into savings – a total of $481,200 to be exact. That’s over $100,000 less than if you were to save for one goal at a time!
Save the Same Amount
There’s also another way: save for all three of your savings goals, but prioritize your closest goals a bit more. You’ll want to save enough to reach your short term goals, but still put a bit towards your long term goals. If you do this, it’s possible to save the same amount every year, and still reach all of your goals. In this case, this family could save $22,850 every year and reach each one of their multiple savings goals. In the beginning years, they allocate more of the money towards the house and college, but still save for retirement. They still get the benefit of a larger investment return with the longer time horizon, but it’s easier to come up with the cash every month. And, in the end, they’ll be able to put away less money than if they were to save for one goal at a time (but more than if they were to save more early on) – for a total amount of $548,400.
Do What You Can Right Now
When you are working toward multiple savings goals, start saving now for your long term goals like retirement. Even if you can’t fully fund your retirement goal right now, you’ll be well on your way to a healthy retirement by letting some of your money go to work for you.
Do you have multiple savings goals? What are you saving for?
This post has been written by Jenna, our staff writer who hails from http://pftwins.com.
Right now my wife and I are are saving for a house down payment and for our retirement. We did the math to figure out how much we needed to save per month for a down payment in a few yeas, so we are saving that amount. Everything else is being plowed into retirement.
Awesome! You’ll have a house soon enough, and a healthy retirement savings too.
Nice article. I really struggle with saving for multiple goals. I just set up an auto investment into Capital One 360 sub accounts and call it a day. YMMV.
That’s a lot to think about. Thanks for showing how the numbers can break down. It’s hard to decide what to prioritize. My husband and I take his company’s 401k match and each have a Roth IRA but we don’t fully fund them each year since we are working on early mortgage payoff. We might have to re-evaluate our approach now!
Jessica, it is tough to decide what to do first. Since you’re still saving for retirement, time is still on your side! Good luck.
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