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 future financial goals is generally pretty easy. The bigger challenge is figuring out how you’re going to save for them all. The trick is to think strategically about your goals and come up with 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 will need for each purpose. We suggest keeping the list short. If you have 15 different goals, you might struggle to keep track of them. Think of this list in terms of what’s most important to you and your family—and prioritize.
One way to do this is to group savings goals by needs, wants and wishes, in order of priority. Saving for retirement will likely be high on the list of needs. And if you haven’t yet set up an emergency fund with enough money to cover at least three-to-six months of essential living expenses, make that a priority, too. Then you could add things like buying a home, paying for college, a dream vacation, a new car or a festive wedding.
Once you’ve made a list of your goals, it’s time to sort them. The time horizon for each objective is a good place to start. This involves dividing your savings into three buckets: the money you expect to need in a few years, in three-to-ten years, or more than 10 years from now.
Knowing when you’ll need the money can help you decide what sort of investments you should consider as part of your plan. In general, it makes sense to use less-volatile investments for short-term goals, as you’ll have less time to potentially recover should the market take a dive. Conversely, you can opt for more aggressive investments for longer-term goals, which provide more potential for returns to grow over time. Here’s how it generally works:
- Bucket 1: Funds for short-term goals, say in the next two years. This could include things like a wedding or nice vacation. Consider traditionally more-stable investments such as cash, money-market funds, short-term Treasury bills and notes or certificates of deposit. Putting money you plan to spend soon into liquid, readily marketable, generally low-risk investments can help you avoid having to sell other investments, such as stock, in a down market to raise cash.
- Bucket 2: Money that you expect to need over the next three to 10 years. This could include goals like a down payment on a home. Intermediate-term assets such as a mix of intermediate-term bonds or bond funds and stocks, with a focus on growth and capital preservation, make sense for this category.
- Bucket 3: Savings you expect to tap no sooner than 10 years from now, say for retirement or your kids’ college. This category should be invested for growth and income, with a larger allocation to stocks.
These categories aren’t one-size-fits-all. Each should be tailored to your risk tolerance as well as your time horizon. And be sure to diversify. You don’t want the fate of your goals to hang on the performance of a single asset.
Once you’ve identified your categories, it’s time to start putting money in them. 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, say every month or every quarter.
Remember, research shows that 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—to work as soon as you can.
And stick to your priorities. Fund the items at the top of your list first, such as your retirement savings.
You will have to do some budgeting to figure out how much you should save for each goal. Use one of Schwab’s savings if you need help.
Check on your investments at least quarterly (or more often if you have a more aggressive portfolio). In general, you should consider making your allocations more conservative as you approach your goals: shift away from riskier investments, such as stocks, in favor of more-stable ones, such as bonds. Major life events, such as job changes, the birth of a child or a marriage, may also call for some adjustments.
Regular check-ins also make it easier to make adjustments. For example, if your realize that you’re not saving enough in a college fund as your child grows older, you might respond by cutting back your spending, increasing your regular contributions or (if your time horizon is long enough) shifting money into more aggressive assets that may generate higher returns.
Remember that you may need to rebalance your portfolio back to your target allocation from time to time. For example, if your stocks appreciate to the point where your stock allocation accounts for a larger share of your portfolio than your target allocation allows, and your bond allocation shrinks, you could consider selling some of the stocks and buying more bonds to bring your portfolio back in line. By rebalancing on a regular basis, you can help ensure your portfolio doesn’t drift too far from your target mix of asset classes. Not rebalancing is akin to letting the market decide your asset allocation over time, which can significantly change your exposure to risk.
Finally, stick to your plan. Down markets can be unnerving, but reaching your goals requires a long-term view and a commitment to staying the course through bad times and good.