How to Save for Long-Term Goals
Whether you're dreaming of sending your kids to college, having a comfortable retirement, or buying a new house or car in several years, you need to save to reach your long-term goals. "Long-term success comes from tying your cash flow to your goals," according to to Eric Roberge, a certified financial planner in Boston who works with young professionals across the country. "Cash flow is the source of everything else."
Planning Your Savings
With a plan in place, it's much easier to meet your savings goals. Erik Klumpp, a certified financial planner and founder of Chessie Advisors, LLC, who works with teachers, engineers and young professionals around the country, suggests a three-step approach: define your goal, determine your available resources and monitor your progress. In addition, "It’s important to connect a specific date and amount for each goal and write them down," says Roberge. "Research shows that when you take these steps, the goals become real and you have a better chance of achieving them."
Sources of Extra Money to Save
Until you take the time to examine your current financial circumstances and where your money is going, you may feel like there's no room in your budget for saving. However, notes Klumpp, "By plotting out and examining your budget, you may be able to find areas where you can trim discretionary spending, like entertainment or eating out, and come up with enough money to fund your goals." He adds, "Extra money may come in the form of overtime pay, bonuses, gifts or inheritances that you do not count as part of your normal budget, but may be used to help fund your goals."
Keeping Savings Separate
Keeping your savings in a separate account from your other spending money helps you avoid the temptation to dip into it for impulse purchases. "Out of sight, out of mind," says Klumpp. "The best way to avoid spending the money you're saving for long-term goals is to have it deposited in a separate account, preferably someplace that is relatively hard to get at. Make sure the money is not commingled with your normal savings as it may be very tempting to dip into for another purchase."
Where to Hold Savings
How long you have before you need to meet your goals also affects where you invest the money you save. "If long-term means five years, then you should minimize risks," comments Roberge. "You might look to a savings account, CD or money market fund. For those who want to take on a little more risk, you might put the money in a brokerage account with a mix of 30 percent stocks and 70 percent cash/short term bonds. For a goal that is 10 (or more) years out, it may make sense to develop more of a diversified portfolio, investing in several different asset classes -- U.S. stocks, international and emerging market stocks, real estate, commodities (and) bonds. The bottom line is that this will all depend on your time frame and appetite for risk."
Budget for Entertainment
Including some spending money in your budget can help you stay on track, because you can still enjoy life while you're saving. "Provide yourself with 'fun' money," says Roberge. "It’s tough to postpone your life, so I recommend allowing yourself to live for today as well." Roberge suggests either budgeting entertainment into your monthly spending or rewarding yourself with entertainment money when you reach certain savings milestones. "It’s nice to reward yourself," he adds. "It feels good and gives you something to strive for in the short term."