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How to Plan for Short- and Long-Term Savings Goals

Key Takeaways

  • Short-term goals are within a five-year window, while long-term goals are at least five years out.
  • CDs, money market accounts, and traditional savings accounts are best served for short-term goals.
  • Investing is generally reserved for long-term goals so there’s time to withstand performance fluctuations.

Timing is a key component of any practical savings plan. But not all savings goals are the same, and the length of time associated with a goal plays a major role in creating an effective plan to meet your objective. A goal that’s five years out will likely have a different approach than one that’s 10 to 20 years in the future.

Any goal within a five-year window is considered short term; anything longer is (you guessed it) long term. Some short-term goal examples include buying a new car or paying down student loans, while long-term goals may be things like saving for retirement, paying for your kids’ education, or buying a vacation home.

To learn how you save for short- and long-term goals, let’s consider the examples of Lucas and Grace.

Planning for short-term goals

Lucas is growing tired of his cramped apartment in the city. The suburbs are calling his name. The 27-year-old is giving himself three years to save for a down payment on a home. How will he reach that goal?

First, Lucas looks at his current savings — $5,000 in an emergency fund, plus $3,000 in a separate, traditional savings account. Second, Lucas does his research on what kind of first home he thinks he can afford and figures a house around $400,000 is in his wheelhouse. After doing some research, he decides he wants to put 5% down on the house, meaning he needs to save $20,000.

Lucas decides he wants to keep his emergency fund separate if at all possible, so the only savings he has to work with are the $3,000 in the traditional savings account. That means he has 36 months to save the remaining $17,000.

How will he get there?

Typically, short-term goals use a certificate of deposit (CD), money market account, traditional savings account, or a combination of those accounts. CDs and money markets don’t have the same types of returns as investment accounts could achieve, but they’re FDIC insured and offer a higher rate of return than a traditional savings account. CDs offer a guaranteed rate of return, while money markets provide more access to your funds.

In Lucas’ case, he decides to take the $3,000 savings and put it into a 12-month CD with an annual percentage yield (APY) of 1.25%. He doesn’t anticipate needing access to those funds in the near future, plus he wants to remove the temptation to use those savings. By using a CD, Lucas’ $3,000 can earn a higher rate than his current savings account, the funds are locked away, and the return is guaranteed. That means he knows his CD will have a value of $3,037.50 at the end of the 12-month term. That might not seem like much, but it’s better than the return he would have received with a traditional savings account.

Since Lucas is able to calculate what his $3,000 will look like after 12 months, he knows he has to come up with the other $16,962.50 over the 36 months. As a result, Lucas calculates he’ll need to save roughly $471.18 each month, which he puts into a separate, traditional savings account.

At the end of each year, he could reallocate his year-to-date savings into a new 12-month CD at the same 1.25% APY to make sure those funds remain untouched, plus earn a modest return as an added benefit. That return could be put toward a purchase for his house, such as a new mailbox.

Now Lucas has a plan to stick to, which is a good feeling. Every time he puts away that $471.18, Lucas knows he’s doing everything he should be doing to reach his goal rather than aimlessly saving and hoping he gets there some day.

Planning for long-term goals

Grace, on the other hand, is looking further into the future. She’s 35, and one day she wants to take her family of four on a two-week trip across Europe, a dream she’s had since she was a kid. Grace and her husband have a five-year-old and three-year old, so they want to wait until the kids are old enough to appreciate and remember such a trip. They hope to take the trip in 10 years.

Planning for long-term goals can be trickier than short-term goals because of the unknown. A lot can happen in Grace’s life over the next 10 years — a new car purchase, unexpected medical expense, or career change are just a few. Those variables make it harder to come up with a consistent savings plan. However, since the savings window is longer, she can afford to take more chances and alter her plan as she goes, particularly since she has some flexibility on when they can take the trip.

How you save for long-term goals comes down to personal preference. Since the savings window is longer, you could open an investment account since you have the flexibility to chase higher gains while also giving you the opportunity to make up for dips in performance. If you’re not comfortable with the risk of loss, you could use a CD ladder, which consists of staggered CDs with various maturity dates. For example, you could put money into 12-month, 24-month, 36-month, and 48-month CDs, and when one matures, you cycle it back into a 48-month CD, and so on.

Meanwhile, some long-term goals have specific accounts you can use with tax benefits, such as a 401(k) or Individual Retirement Account (IRA) for retirement, or a 529 plan for college savings.

OK, back to Grace. She estimates they’ll need $20,000 for the family vacation, and Grace opts to open an investment account to help her get there. She’s comfortable with taking on risk, knowing the vacation is more of a “want” than a “need,” plus she has the flexibility to postpone the vacation a year or two if she needs more time to reach the $20,000 goal.

Assuming a hypothetical 7% annual rate of return, Grace calculates she could achieve her goal (and potentially more) in 10 years by contributing $150 a month to her investment account.

Here’s how her money could grow over the 10-year window if compounded annually:

Year

Cumulative Contribution

End of Year Balance

Cumulative Return

1

$1,800

$1,857

$57

2

$3,600

$3,844

$244

3

$5,400

$5,970

$570

4

$7,200

$8,245

$1,045

5

$9,000

$10,679

$1,679

6

$10,800

$13,284

$2,484

7

$12,600

$16,071

$3,471

8

$14,400

$19,053

$4,653

9

$16,200

$22,244

$6,044

10

$18,000

$25,658

$7,658

*This chart is for illustrative purposes only and does not represent actual or future performance of any fund.

Then, if the long-term capital gains tax rate is 15%, Grace will have earned a total return of $6,509.30 (85% of $7,658). That means she’ll have $24,509.30 ($18,000 + $6,509.30) at the end of her 10-year window, $4,509.30 more than she targeted. She could take that extra return and put it toward the vacation, or reallocate it to another financial goal.

This is Grace’s plan for now, but depending on where life takes her, she can alter it accordingly.

The bottom line

Regardless of the goal, saving involves outlining a good plan and committing to it. You could come up with the perfect plan but it’ll only work if you stick to it. In some instances, it might make sense to seek a financial professional’s assistance. Having a plan can also take a daunting goal — such as a down payment on a house or family vacation to Europe — and help you understand how to achieve it.

So the next time you have a goal in mind, map it out or talk to a professional. Take a look at your budget to see how much room you have to contribute to the goal on a regular basis. It might be more achievable than you originally thought. Once you have a plan set, you can go about your life knowing that if you stick to it, you might turn that dream into a reality!

More information

Creating a savings plan and sticking to it can require some assistance. Our dedicated colleagues can help put you on the path to success by finding the right solution to help you achieve your goal and reach your potential. To learn more, please call 1-877-360-2472, visit us online, or schedule a Citizens Checkup at your nearest Citizens Bank branch.

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