Saving Money – A Common Goal: How To Create Better Goals

Whenever I ask people about their financial goals, I almost always hear something along the lines of "save more money".  I usually follow up by asking why they want to save more money, or what they want to save for, as simply "saving more money" isn't a clear goal.

If saving money is your goal, we need to make it a clear goal.  We can make our goals better by doing the following:
  • Making our goals measurable
  • Assigning a time-frame to our goals
  • Assigning a purpose to our goals

So, let's take our vague goal of "saving more money" and actually define it.  I want to save X dollars by Y date because of Z reason.  If you'd like to see an example, I've defined that goal through my 99K challenge, where I want to save $99,000 dollars by October 3, 2017 in order to prove to myself what I am capable of.

Why it's important to be clear with your goals

It's important to be specific with your goals because you can't accomplish what you don't define.  For example, say that I want to save money (with the idea of purchasing a property in my mind, but not explicitly stated).  But, I end up stopping at $500.  Did I actually accomplish my goal?  I mean, I did technically "save money", but I didn't accomplish what I wanted.  Basically, you've got to know what you want to get what you want.

The second reason why it's really good to clearly define your goals is that you can work backwards from that goal and come up with a plan to achieve it.

Define your savings goal + create a plan to accomplish it

Now that we know why its important to define a savings goal, let's walk through how to actually define a goal and make a plan to accomplish it.

Why/What do you want to save for?

The first thing that we want to do to our money saving goal is to give it a purpose.  In order to do this, you'll need to do some introspection to determine why you want to save more money.  Is it to create an emergency fund? Is it to get a fancy new car or house?  What about retirement?

How much would you need to save?

Now that we've got our purpose, we can get started on figuring out a dollar amount.  What you need to do is conduct some research to find out how much money you need to save to accomplish your purpose.  If your purpose is to obtain a house / car, you need to find out how much money you will need to save for a down-payment.  If that purpose is retirement or an emergency fund, you need to decide how much money you need to be comfortable in retirement or an emergency situation.

How long do you need to save that much money?

After we've found out why we want to save money, and how much money we want to save, the last step is to attach a time frame to our goal.  Basically, how much time do you need to accomplish your saving goal?  For retirement, you will probably need decades, whereas for something like an emergency fund, you may only need a few months.  Obviously, this varies goal to goal and is highly dependent on your income and how much you can comfortably save.

However, what is really important is to actually do this and get a solid time-frame for your saving goal.  This is important because different time-frames can take advantage of different strategies to save money.

Short Term to Long Term

Saving Money - A Common Goal | Goal Timeline

The only physical different between short term and long term is time.  However, because of that time difference, there are also several other differences that arise as a consequence.  Here are some of the differences:

  • Risk involved when saving through an investment account (Generally the longer period you invest over the less risk you take)
  • The amount you can save (people often underestimate what they can do in the long term and overestimate what they can do in the short term)
  • Available financial vehicles / assets (A 5 year CD wouldn't work well for a goal with a 4 year time frame)

Determine if your savings goal is short term or long term

You can almost split every saving goal into one of two categories, short term and long term.  The main factor that separates saving goals between short and long term is their time frame.  The time frame is how long you have to achieve your goal.  Typically, I would describe any time frame as less than 3 years short term, and any time frame more than 5 years long term.  If your time frame falls is between 3-5 years, it's in a gray area as to whether it is short or long term.  In this case, I guess you could call it middle term.

In any case, it's a good idea to determine whether your goal is short or long term, so that you can utilize a saving strategy with that goal in mind.

Short term saving strategy

If your goal is short term, which means you have less than 3 years to achieve it, you probably want to stick with the following financial vehicles:

  • Savings accounts
  • Certificate of deposits (If your saving goal is as long as the CD length)
  • I-bonds (If your saving goal is greater than 1 year)

The main reason that these vehicles are chosen is that they are liquid, (meaning that you can get your money back in cash quickly) and safe (meaning that they will not drop in numeric value).

Why this is efficient

The main reason that saving your short term money in safe, liquid accounts is efficient is that it provides a higher risk-adjusted return.  Other investment vehicles carry risk, meaning that you can lose or gain money any given day.  If your time horizon is short, you may need to pull your money out during a cycle where you have lost money, thus locking in a real loss.

If I had to choose between the 3, I would argue that certificate of deposits and I-bonds would give you the greater risk-adjusted return at the cost of some flexibility to withdraw your money.

Long term saving strategy

If your saving goal is long term, you have a lot of options to consider for your financial vehicle (too many to count)!  However, if you are saving long term here are some general options:

  • Long term government bonds
  • Brokerage accounts
  • Retirement accounts

Essentially, the longer your saving time horizon, the lower risk you have of losing money.  For example, the worst 30 year annual return in stock market history is a little lower than 8%.

Why this is efficient

Saving for long term goals allows you to invest your money in higher return opportunities with lower overall risk.  For example, there is no reason to put your money in a saving account earning 1% for 10 years when you could instead invest that in a 10 year government bond paying you 2% interest, (as long as 10 years is your time frame).

Essentially, when you have a long time frame for a savings goal, saving that money through investments (stocks, bonds, etc.) provides a much higher risk-adjusted return than using something like savings accounts or certificate of deposits.

In the end

As long as you keep to your goal and make consistent, steady progress at it, you will probably accomplish your goal.  It's just a matter of when.  However, you can potentially shorten that "when", by taking advantage of saving strategies and investment vehicles.  Ultimately, the best advice I can give is to simply define your goals clearly and develop the resolve to follow through with a plan to achieve your goal.

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I'm always hungry - hungry for food, hungry for knowledge, hungry to take action for a better life. As a result, I'm always learning, writing, and wrecking the world as hard as I can. Whenever I have downtime, I like to watch anime, read business books, and exercise. Alright, I don't actually like to exercise, but if I don't exercise I won't be able to do the things I love as long as possible. Anyways, I write about my experiences and knowledge gained from investing over @ akashsky.com

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Posted in Finances, Guest Post, How To, Saving Money and tagged , .

54 Comments

  1. These tips are really great and useful. I like the one about asking yourself what you are saving for and precising your goals- that can give a good motivation to start saving.

    • Depending on what your goal is, there may be a better way for you to save your money. Regardless, you can’t go wrong with a nice savings account.

  2. What a well written post. I learned a lot, my problem is I haven’t earned my pay check yet, I spent them all already, oh no!

  3. I’ve never really considered I-bonds before – you’re definitely giving me pause to take another look. I’ve always been very CD-focused, but I’m always up for broadening my horizons 🙂 Thanks for this article!

    • No problem Caitlin! Typically when it comes to choosing vs CDs and I-bonds, you want to look at inflation and interest rates. Right now, we are starting to have increasing inflation and interest rates. However, our interest rates are still very low, and inflation is probably going to reach ~2% this year. In circumstances like these, I-bonds offer a much better return.

      However, if the situation was different, i.e. low inflation but high interest rates, CDs would probably offer a better rate. Make sure you compare the interest rates between the two before you commit any substantial amount of money!
      Akash recently posted…99K Challenge: Analyzing My Investment PortfolioMy Profile

    • Your welcome! There’s something magical that happens when you are accountable and specific – it becomes harder to simply let go of your goals because there is something pushing you to stay your course.

  4. So many great examples of what to do versus just letting your finances flop around in the wind. I know that I am always looking to build up a savings buffer in case of emergencies. I just never get to the 6 months of salary before something happens and we have to deplete the money.

  5. I never thought that I should be specific with my money goals. I just thought that ‘save more money’ was a good enough goal.
    This outline helps me a lot, I wrote a lot of it down so that I can properly put into words and amount what I want to do with the money.

  6. Great and thoughtful post. Well-written as well as informative. Savings is an important aspect that most people (me included) sometimes forget or neglect. It’s January, perfect month to start to saving up!

  7. Money saving and money managing is really something that should be taught more in schools. I think a lot of people could benefit. Like you say, this goal setting can apply to more than just money. These goal remind me of SMART (specific, measurable, attainable, realistic and tangible) goals.
    Wanderlust Vegans recently posted…The Versatile Blogger AwardMy Profile

    • SMART is a really cool acronym to describe good goals! I agree that this stuff is not taught in schools, but then again, they often have their own agenda of math & science & english. It’s honestly up to the students themselves to actively choose and learn about money.

  8. My savings goal is to buy a house and a trip to Florida in March, Colorado in December and New York in June 2018. I really need to start setting aside money to achieve those goals.

  9. When thinking about your savings it’s important that you have goals in mind and oftentimes it’s good to know which ones are for long term and short term. I think this is an effective way to help yourself to save more money.

    • Yeah, separating goals into long and short really help with identifying proper saving strategies. I wonder if there’s anything else that could be done in tandem to make it even more effective.

  10. All of these tips are awesome. Saving even more this year is a goal of ours so that we can put away for future endeavors instead of just one year at a time.

  11. Having clear set goals really does make a difference. For many things that is true, most espeically for managing finances.

  12. My husband and I are currently trying to save money! We have been saving an amount each week based on a challenge! We are excited to see the final result!

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