Goal oriented saving is used to meet future financial objectives, which are usually longer-term in nature and often require saving money in a structured, disciplined way. In this instant gratification world we live in, it’s hard to think about paying out-right for large ticket items, such as a house or a car or higher education. The easiest thing to do is to borrow from the future in order to pay for current needs and wants, or in other words, it’s much less painful to take on debt today and have what you want now rather than have to sacrifice for it. Financial institutions make it so easy to borrow. Some may ask why bother going through the pains of saving if you can just borrow and have what you want now? Well, the reason is that borrowing is not free.
When you decide to save, you’re in control. You make the plan, so your financial situation is under your terms and your conditions. On the other hand, if you decide to borrow, you let the financial institutions impose their conditions on you and as a result, you lose some control of your financial situation down the road. It’s not a matter of having to sacrifice now to save, but rather it’s whether you want to sacrifice now with you in control or sacrifice later and be under someone else’s control. Additionally, borrowing costs money, and this expense can be significant depending on your loan terms. You’ll end up paying a lot more for what you want when borrowing than you would if you were to purchase the item using your savings. Goal oriented saving is a great way of reaching your objectives.
When saving, it’s imperative to have clearly defined, measurable, and realistic goals. Having such goals will motivate you to achieve them and will give you the ability to track your progress. Define your goals first. Writing down that you’re saving for a car is not enough. What type of car do you want? How much is the car you want? Will you be paying for all of it in cash or will you be taking out a loan to help? Once you’ve defined your goal, determine how to measure it. Sticking with the car example, when do you intend to buy the car, 1 year from now? 5 years from now? How much are you going to save each month for it? Your plan should have checkpoints to make sure you’re on target. If, when you check your progress, you’re behind target, increase your savings to compensate, and if you’re ahead well then keep it up. Finally, make sure your goals are realistic. In most cases, the car you’re saving for should not be a Ferrari. Setting unrealistic goals will lead to discouragement and make you less likely to set goals in the future. Don’t set yourself up for failure. Setting goals and adhering to your savings plan can be daunting, but it is the best way to realize your goals.
How to save for your goals can be a complex question. If you’re not sure how to begin saving, then start simple. You can open a savings account dedicated to your goal at your local bank and make scheduled deposits. Your method for saving can get more complicated, and it may make sense for you to learn about investing your money in order to help you achieve your goals. Investing is a huge subject, but some of the more important topics to understand include your reward expectations, your risk tolerance level, and your investment horizon. You may want to seek out a reputable financial advisor to help you make a financial plan for your goals. By investing intelligently, you may be able to achieve your goals a lot earlier than you think.
Your choice in what you decide to save for is a personal matter, because it’s what’s important to you. However, there are some areas you should take under consideration, including emergencies, cars, housing, higher education, skills education, networking opportunities, and retirement. Here, goal oriented saving can help.
Emergencies -Emergencies, by their very definition are unexpected. Unfortunately, these situations are often costly and can drain us financially. Some examples include medical expenses, car repairs, and getting laid off.
Cars – Cars are very expensive. It’s not very likely someone has $20-$30k lying around to buy a new car. As a result, people often resort to taking on auto loans – loans that will cost them above and beyond the value of the car. If you can, goal oriented saving can help you put some money away each month to prepare for this expense. If you save $200 a month for 8 years, you will have $19,200 to spend. And that’s assuming no interest. If you can’t save the full amount for the car, paying for some of it will allow you take on less of a loan and still help you save money. Best bet is to save your money and buy a second hand car.
Housing – Conventional home loans require a 20% down payment. Those that don’t may charge you higher interest rates or require you to pay mortgage insurance. Obviously, we want to keep costs as low as possible. This is likely to be a big chunk of change, so try to put aside a lot each month for this one. Again, as mentioned, if companies are moving out of an area or jobs are becoming scarce, realize that investment in a house would then be the wrong move. In many areas what was once an ‘appreciating asset’ is now a ‘depreciating asset’.
College – the cost of college continues to rise at a rate well above the rate of inflation. There are programs, such as ‘529 plans’ that can give you a tax-friendly way to save for college. If you are unclear AT ALL about what college and what major would bring you a livable wage by going, DO NOT GO! Goal oriented savings is meant for goals that will get you somewhere.
Retirement – this will likely require the most savings, considering you will be relying on these assets to fund your lifestyle while not working any longer. There are many plans that can help you achieve your goals, including 401k plans and IRAs. It’s best to consult a well-regarded financial advisor to help you craft a plan. You may also want to entertain not accepting the current ‘retirement’ paradigm. Instead, plan your savings for many mini-retirements throughout your life. That way, you actually enjoy what you’re doing while in the good health and energy of youth and middle age.