How to save for multiple goals is a key financial decision that people struggle with. Do you fund several goals simultaneously or in small steps? There are basically two approaches to setting financial goals:
Save for more than one financial goal at once: Savings for multiple financial goals simultaneously.
In a sequential manner: Save for a financial goal in small steps.
Each method has pros and cons. How to choose the best method for you
Sequential Goal Setting
Pros
When you achieve each goal, you can feel accomplished. Savings plans with a single goal are easier to manage and set up than multiple-goal plans. Only one account needs to be set up and managed.
You can also find out more about Cons
Compound interest does not apply retroactively. If you take up to 10 years to reach your long-term saving goals (e.g. funding a retirement plan), interest will not be earned.
Concurrent goal-setting
Pros
Compound interest does not delay savings for future goals. The sooner money is put aside, the more it will grow. According to the rule of 72 you can double your money in 9 years with an average return of 8 percent. Savings for long-term goals is most effective in the first years.
You can also find out more about Cons
Multi-tasking is much more difficult than a single task. Income must be allocated separately to each goal, and is often placed into different accounts. It will also take a lot longer to achieve any goal if you are saving in different places.
Research Findings
With four colleagues, I worked with Wise Bread in order to recruit respondents. We conducted a Study of Financial Goal-Setting Decisions that was published recently in the Journal of Personal Finance. The sample was primarily composed of young adults, with 69 per cent under the age of 45. Four major financial decisions were examined: financial goals; homeownership; retirement planning and student loans.
The results showed that respondents delayed homeownership and retirement saving and instead sequenced their financial goals. Many respondents used three-word phrases such as “once I achieve …,”,” “after [action],” or “as soon …,”. This indicates a hesitation to fund financial goals before achieving other goals.
One thousand and five hundred eighty-eight respondents reported that their top three financial goals were to save for something, buy something, or reduce debt. Around a third of the sample (32%) had outstanding student loans at the time data was collected. Student loan debt affected respondents’ financial decision-making. Around three quarters of the sample reported that loan debt affected housing decisions and retirement savings.
Steps to take action
Here are five ways you can make better financial choices based on the results of the study.
1. Consider concurrent financial planning
Rethink your practice of completing one financial goal at a time. Concurrent goal setting will maximize the power of compounding interest and avoid the often-reported survey results that the completion date of one goal would determine the date to start saving for other goals.
2. Positive financial actions to increase
Increase your efforts to improve your finances. If you save 3 percent of your earnings in a SEP IRA (if you are self-employed), 401(k), or 403(b), employer retirement savings plans, increase that to 4 or 5 percent.
3. Reduce negative financial habits
Stop (or reduce) expensive actions that undermine financial security. Each person has his or her own culpable. Cost savings, health effects, and personal enjoyment are all important criteria.
4. Savings for Retirement
Nearly 40 percent of respondents had no retirement savings, which is alarming. People’s actions (or lack thereof) affect their future. Saving is better than not saving at all. Even modest amounts, like $100 per month, add up.
5. Calculate your financial situation
Set financial goals using an online calculator and create a plan to reach them. Planning helps people feel more in control of their finances, and increases their motivation to save. FINRA, and Practice Money Skills provide useful tools.
What is the best way to set aside money for financial goals and how can I do that? It depends. The most important thing, however, is to take positive action. Consider the pros and cons and your personal preferences of sequential and concurrent goal-setting, and then choose a regular saving strategy that suits you. Each small step counts!
