How to Save for Short-Term Financial Goals
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Determine your financial objectives
Saving is always easier if you have a plan. When starting your short-term savings program, try to think of real-life expenses that you'd like to have covered. Vacations are a great example. Generally, you'll know how much time off you have every year, so that's a great help in the planning process. If your car is getting up in years, you can anticipate needing to buy or lease a new one in the near future. A generic emergency fund is also a must, according to Jeff Gonzalez, a certified public accountant and the chief financial officer at Maya Entertainment in Los Angeles. "The more you can stash away for unseen emergencies, the better, but most savers should tuck away at least three to six months' salary for the unexpected."
Set realistic targets for saving
The danger in planning for any investment need is that it's much easier to set goals than to meet them. Avoid the temptation to set pie-in-the-sky goals that are destined for failure. While it would be great to have enough money to meet all your goals with money to spare, the reality for most investors is that "wants" will nearly always exceed the amount of available money. If you set goals that are too difficult to reach, the peace of mind you strive for can be overwhelmed by anxiety as you try to stretch your budget to the limit.
Use real life numbers to help you set realistic targets. Gonzalez suggests, "A good place to start is to average your actual costs over the past few years." For example, you can use your budget from prior vacations as a starting point for setting aside money for this year's trip. Some quick research on current car prices can give you a sample range of how much cash you might really need for that new car.
Develop a plan to reach your savings target
Once you've set your targets, you have to develop a plan to reach them. To keep you on track, it helps to understand your level of discipline. Some investors can diligently carve out a percentage of their take-home pay and put it away with no problems. Others need a little more help. Ask your bank or financial services firm if it has any programs to help you automatically put aside money. Credit unions are often particularly good at providing options for savers. If you can't find a program to your liking, at the very least you should be able to set up automatic transfers from your checking account to your savings account.
"The old adage of 'paying yourself first' is extremely helpful when it comes to savings," Gonzalez notes, since it ensures that your savings needs are met as soon as you get your paycheck. Waiting to put money into savings is a recipe for disaster, as that money will often find its way to other needs or wants before the end of the month.
Choose appropriate investments
Developing a short-term savings program is worthless if that money evaporates due to poor investment planning. It is foolhardy to take investment risks with money you set aside for near-term needs. "Trying to squeeze an extra buck out of short-term savings could result in you having nothing at all," notes Gonzalez. Focus on secure, liquid options for your short-term savings. "Money market funds, certificates of deposit and generic savings accounts can all be appropriate for short-term money," Gonzalez says. When you have a CD or savings account at an institution insured by the Federal Deposit Insurance Corp., your money is protected in case the institution fails, up to $250,000. Treasury bills, which are short-term securities guaranteed by the U.S. government, are also appropriate investments when saving for an upcoming goal.
Compare investment costs and features
Although money market accounts, CDs, savings accounts and Treasury bills all may be be appropriate for your short-term investments, their costs and return may vary. Some banks or brokers may charge higher fees than others for the same investments. Money market funds and CDs generally have different rates from bank to bank. Sometimes issuers tweak the standard model and offer non-traditional securities. For example, some banks may issue CDs that change the interest rate they pay or that may be taken away from you before the stated maturity date. Shop around to find the best combination of return, reliability and access to your funds.