Sorry for the delay on this latest post, I had some exciting real-life stuff happen: I got engaged! My conversations with my fiance (still so weird using that term!) regarding how to save for wedding expenses are actually what spurred this post.
So often in life, and especially in finance, we are asked to put off our short-term desires in favor of long-term goals. It can take a lot of effort not to buy that fancy Starbucks latte and save your dollars toward that new car instead. Self-control when it comes to finances is something that many find extremely difficult, but without it, you can never achieve big goals. However, big goals can vary in their “bigness”–for example, you may want to save for a house, and also save for that sexy new gaming rig; or maybe you know your car’s going to kick the bucket, so you need to start saving for a newer model, but you also really want to upgrade that college wardrobe of bad T-shirts and that one hoodie you wore for a whole semester straight once.
Sometimes two desired spending goals present themselves at the same time. One might be bigger and longer-term (on the horizon of a year or few years), and the other may be shorter-term (a few months) and a little bit smaller in scope. How do you balance these goals?
1. Decide on a Timeline
The best thing you can do for your goals is to decide when you want them to come to fruition. A month from now? Two years from now? Figure it out. If you’re unsure, just make your best guess. In the “run down car vs wardrobe upgrade” example I mentioned in the introduction, maybe you’ll guess that six months is about how long you’ll be able to keep the car running, but it’s not the end of the world if you buy your wardrobe slowly over the next year.
2. Decide the Total Amount to Save Each Month
If you don’t already have a budget, it’s time to make one. There are a lot of ways to do this. Use software like Mint, Personal Capital, Quicken, or You Need a Budget to track your expenses and find out how much you spend in a month. Or, simply keep your receipts and track the amounts in an excel spreadsheet. Once you know how much you spend, subtract that from how much you make, and that’s your net savings per month. As a rule of thumb, take that number and multiply it by the longer of your two goals. Is that amount looking pretty paltry compared to the cost of your goals? You either need to reduce expenses (try putting yourself on a no-restaurant lockdown or stop letting yourself do leisure shopping), to make more money (this one’s harder, but you can try negotiating your salary), or to extend your timeline.
3. Decide the Amount to Save Per Goal Each Month
It’s time to figure out how much to dedicate toward each goal every month. There are a few ways to do this. One method would be to save 100% of the short-term goal before saving toward the long-term goal. This is good for things like “I want to save for a house, but I’ve got some urgent bills to pay off first”. Another method would be to save proportionately for each goal based on the amount of time you have to save for it. For example, you have 12 months to save for new clothes ($300) and 6 months to save toward a better car ($5,000), so save $300/12=$25 per month toward the clothes, and $5,000/6=$834 per month toward the car. Once six months passes and your car is paid for, you can start focusing all your efforts on the new wardrobe and potentially finish saving for it even sooner. The best decision here depends on the goal and your level of patience, so do what makes sense for you. Make sure your long-term goal doesn’t fall by the wayside though! Don’t promise yourself that you’ll start saving for that house once you finish saving for a new computer, then decide once you’ve bought the computer that you’d actually prefer to save for a new smartphone than a house. Make a plan, and really stick to it.
How do you balance your long- and short-term financial goals? Any good strategies for reducing spending to reach your goals faster? When have you succeeded in managing multiple goals at once?