Everyone has a wish list: a new car, a bigger house, a tropical vacation or maybe a student loan balance of zero. Checking items off that list, however, takes intricate planning and budgeting know-how to stretch your money far enough to make all your financial dreams come true, whether you are saving for short-term projects or long-term goals.
A new house is on Heather Arnold’s wishlist. “We’re just looking for one that has enough bedrooms and a garage,” said Arnold, a personal trainer that’s currently living in a rental without a garage in southern Louisiana where the heat index routinely soars into the triple digits.
She’s been saving for two years, aiming for $10,000 to pay for closing costs and extras like a new refrigerator. “When I get paid, I immediately move money over to my savings account,” Arnold said. “I try to do 10%. Sometimes I do more than 10%, it’s more like 15%.” And she’s almost there. They’ve even put in two offers on houses, but so far they are still living in the garage-less rental.
Along with the house, Arnold is also working to pay down her student loans. She’s paying $315 per month and has about $20,000 left to go on the loan which is due to be paid off in 2025.
Mike Watts, vice president of One Wealth Management Financial and Insurance Services in California, uses three different timelines to help his clients plan their financial future.
“I kind of space it out like this: short-term goals I consider one to three years, medium-sized goals maybe three to 10 years, and then anything after 10 years is a long-term goal,” he said.
“Short-term goals I consider one to three years, medium-sized goals maybe three to 10 years, and then anything after 10 years is a long-term goal”
Short-term Budget Strategies
“A lot of people, when they come to me, they’re trying to figure out either how to balance their debt and how to knock off some of their debt,” Watts said, listing saving for a house and paying down student loans as other common short-term goals.
The most common savings pitfall? A lack of budget, Watts said.
Figuring out how much money you bring in and how much you need to pay out, sounds simple, but Watts has found that most of his clients admit to keeping a loose tab in their head, rather than hammering it out line by line on paper.
“We pay our bills, we know when our bills are due, we know how much rent is and then we just kind of think anything left over is haphazard — we can do anything we want with it, whether it’s for fun or savings,” he said. “The thing I do especially with younger clients is I say okay, let’s get a budget down, let’s go over a budget and let’s really stick with it. And I’m not the fun police. I tell them that too.”
Yes, you can still go shopping and out for drinks, Watts said. “You’re still going to get to go to Cabo if you want to. Maybe it will take you an extra month or two of savings, but we’re still putting money in there.”
“If the short-term goal is we’ve got $4,000 to $5,000 in credit card debt that we want to get down sooner rather than later because of the interest rates, let’s look at where the money is going right now. And let’s readjust it,” he said. “Maybe we cut down $40 or $50 on clothes for the month or $40 or $50 on coffee for the month.”
Arnold said she and her husband have cut the cable cord in the name of padding their savings accounts. They also cook at home and meal plan to avoid eating out, and Arnold is still driving her 12-year-old car.
Anyone can put a little extra aside, no matter how big or small their paychecks may be.
“Put at least 10% into a savings account that you don’t touch, starting the moment you have a job. You’ll use it for something and it will always come in handy,” she said. “10% of $200 is just $20 and anyone can do that. You’ll adjust to living that way and it will never be a hit.”
“Put at least 10% into a savings account that you don’t touch, starting the moment you have a job.”
Other savings hacks that will get measurable results in a short period of time? Add in some additional tax write-offs, such as childcare or location-based write-offs, and re-adjust your 401k.
“If you’re having trouble meeting the budget and you need a little bit more money in that paycheck, instead of putting in 6% of your check into a 401k, maybe you put 3 or 4% in for a little while and you’ll see a bit more money come in,” Watts said.
“But you have to do it as an exercise in front of you. You can’t do it in your head,” Watts said. “If you go a little bit over, it’s not the end of the world, but the more you hold yourself accountable to that budget, and if you have it in front of you, it becomes a real thing as opposed to this abstract notion of how much money you have in your mind.”
You can also track your short-term goals with a budget built on a simple spreadsheet or with an online tool, such as Bankrate.com’s online budget calculator. There are also several free budgeting apps, such as Mint, Wally, and PocketGuard.
Planning for the Future
Long-term goals take a bit more commitment as you are saving for something that is likely a decade or more down the road.
“Long-term, what do you really want to do? Do you envision yourself traveling a lot, do you envision yourself moving?” Watts said he asks his clients. “It’s if you have children, building up accounts for them to help them when they reach college age. Or figuring out how much money you think you’re going to need to live in retirement.”
Watts recommends growing your money over the years in a series of what he calls “buckets” — putting money in the stock market or into 5- to 7-year annuities, and contributing the highest amount you can to your 401k to take advantage of your employer’s matching program.
“It really depends on what your tolerance for risk is. The stock market, right now, is doing fairly well and it has been doing fairly well for a couple of years, but we’re also due for a correction,” Watts said. “You try to have it in a bunch of different pots — some of it may be growing faster than others and some of them might not be as volatile as others — but everything is working in sync to get you to that golden parachute when you decide to call it quits.”
Arnold admits she hasn’t been as proactive about saving for retirement as her husband, who keeps a “do not touch” fund that they both contribute to in the form of tax refunds or other extra funds that pop up.
She also has a 401k that she regularly contributes to and “once I have a house, I’m going to continue saving like I do,”
Watts said he pushes even his youngest clients to start putting away for retirement age, though they sometimes stare at him blankly.
“Lord knows I didn’t think about it in my 20s,” Watts said, laughing. “We were busy going out and seeing our friends and going to the movies and eating out at nice dinners. And retirement or savings were long down the road no matter what our parents told us.”
Do the math, he said. If you have $1 million saved up by the time you retire at age 65, that seems like a lot, right? Not necessarily. The general rule of retirement, Watts said, is to take out only 3 to 4% of your retirement fund each year to live on and live comfortable. With $1 million that’s only $30,000 to $40,000 per year. You can live comfortably on that in some areas of the country, but not in most places, he cautioned.
“The more you can put away now,” he said, “the better you off you’re going to be and the more money you will have to pull from in retirement.”