APRIL 12, 2017
A comfortable retirement. A new car. A down payment on a house. Paying for a child’s college education.
Coming up with a list of future financial goals is generally pretty easy. The bigger challenge is figuring out how you’re going to save for them all.
For most of us, socking a few extra dollars away in a savings account each month may be a good start, but it’s probably not enough, especially if we’re talking about multiple goals. The trick is to think strategically about your goals and come up with a saving and investment plan for each one. A little effort today can help make a big difference down the road.
Here are a few steps you can take as you work toward achieving your goals.
Set your goals
The first step is pretty easy: Write down your goals.
We suggest keeping the list short. If you have 15 different goals, you might struggle to keep track of them all. So think of this list in terms of what’s most important to you and your family—and prioritize. One way to do this is to group savings goals by needs, wants, and wishes, in order of priority. Saving for retirement will likely be high on the list, and we would also suggest setting up an emergency fund with enough money to cover at least three-to-six months of essential living expenses. Then you could add things like buying a home, paying for college, a dream vacation, a new car or a festive wedding.
Sorting and allocating
Once you’ve made a list, it’s time to sort them by time horizon. Here, you can take advantage of a technique known as “bucketing” that many people use to calculate their retirement income. In short, this involves dividing your money into a series of buckets that hold what you will need in a few months, in a few years or in 10 years or more.
Knowing when you’ll need the money can help you decide what sort of investments you should consider as part of your savings plan. In general, it makes sense to use less-volatile investments for short-term goals, as you’ll have less time to recover from a dip in the market, and more aggressive investments for longer-term goals, as potential returns can have more room to grow over time. Here’s how it generally works:
- Bucket 1 is where you save for short-term goals, say in the next two years. This could include things like a wedding or nice vacation. Consider traditionally more-stable investments such as cash, money-market funds or short-term Treasury bonds or certificates of deposit. Putting money you plan to spend soon into liquid, readily marketable, generally low-risk investments can help you avoid having to sell other investments, such as stock, in a down market to raise cash.
- Bucket 2 typically holds money that you expect to need over the next three to 10 years. This could include goals like a down payment on a home. Intermediate-term assets such as a mix of intermediate-term bonds or bond funds and stocks, with a focus on growth and capital preservation make sense for this bucket.
- Bucket 3 typically holds money that you expect to need in 10 years or later, say for retirement or your kids’ college. This bucket should be invested for growth and income, with a larger allocation to stocks.
Note: These buckets aren’t one-size-fits-all. Each should be tailored to your risk tolerance for each goal as well as your time horizon. And be sure to diversify. You probably don’t want the fate of your goals to hang on the performance of a single asset.
Once you’ve identified your buckets, it’s time to start putting money in them. Even modest contributions, when made regularly, can pay off substantially over time. You could even consider using a strategy such as dollar-cost averaging, which is when you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of how the price fluctuates. That generally means buying more shares when prices are low and fewer shares when prices rise.
And stick to your priorities. Fund the items at the top of your list first, such as your retirement savings, regardless of what bucket they are in.
Note: You will have to do some budgeting to figure out how much you should save for each goal. Use one of Schwab’s savings calculators if you need help.
Stay the course
Check on your investments at least quarterly (or more often if you have a more aggressive portfolio). In general, you should consider making your allocations more conservative as you approach your goals by shifting away from riskier investments, such as stocks, in favor of more-stable ones, such as bonds. Major life events, such as job changes, the birth of a child or a marriage, may also call for some adjustments.
Regular check-ins also make it easier to make adjustments. For example, if the price of a college education rises faster than you planned for, you might respond by cutting back your spending, increasing your regular contributions or (if your time horizon is long enough) shifting money into more aggressive assets that may generate higher returns.
Remember that you may need to “rebalance” your portfolio occasionally, which involves selling assets that have appreciated and buying more of those that haven’t done as well. For example, if your stocks appreciate to the point where your stock allocation accounts for a larger share of your portfolio than your target allocation allows, and your bond allocation shrinks, you could consider selling some of the stock and buying more bonds to bring your portfolio back in line with your target. By rebalancing on a regular basis, you can help ensure your portfolio doesn’t drift too far from your target mix of asset classes. Not rebalancing is akin to letting the market decide your asset allocation over time, which can significantly change your exposure to risk.
Finally, stick to your plan. Down markets can be unnerving. Successfully managing investments requires a long-term view and a commitment to staying on track.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events can be created that may affect your tax liability.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
Schwab Intelligent Advisory is made available through Charles Schwab & Co., Inc., a dually registered investment advisor and broker-dealer.
Schwab Intelligent Portfolios® is made available through Charles Schwab and Co., Inc. (“Schwab”) a dually registered investment adviser and broker dealer. Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are affiliates and subsidiaries of The Charles Schwab Corporation.
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