Prioritizing your financial goals can seem like a tug of war – save for retirement or for a down payment? Help send the kids to college or purchase a new vehicle? Go to a destination wedding or add a screened-in deck?
Part of your financial planning requires knowing if you should be saving for the short term or long term. That can help you understand your savings time frame and the type of accounts where your money should go.
Your short-term goals are those items you want or plan to do within the next five years. This can include saving for a car down payment or taking a trip to Italy.
Often, people use their chequing account to store these funds as it is a short-term account that people already have. However, the interest earned is very low and placing your savings into everyday accounts will make it difficult to ensure that your savings remain as savings.
Look for savings instruments that have short-term maturity dates and that let you access your funds within a reasonable time frame and without penalty fees. For example, 90 day Guaranteed Investment Certificates (GICs) and higher interest savings accounts are low-risk options that may earn more interest than a chequing account. Also, keep your savings in separate accounts intended solely for your short-term financial goals.
Larger financial goals, such as retirement savings, need longer-term planning and investing. Typically, it means you won’t need to access the funds for at least ten years. This requires finding a strategy that accounts for the level of risk you are willing to take, the amount you will be saving over the long-term, and the amount of time you have both to save and invest.
Initially, aim for a higher proportion of more risk-to-less risk investments, and then gradually increase your less risky and income-generating investments. This will help you obtain a better return on your investment earlier on when your investments can handle more risk. For example, look at stocks that are cyclical and those that offer dividends and interest as a way to overcome the negative effects of inflation. Financially, time is your friend. The longer you can leave your money, the better your chances of making a larger profit.
A Last Thought
By choosing savings and investments that complement your specific financial goals, you can improve the odds of achieving your objectives with ease.