How to Save for Small Goals

by Kevin on September 21, 2009

A reader wrote in with this question.

After reading your article on flexible budgeting, I wanted to ask a question to build on your notes about flexible budgets.

One question I have is in regards to financial goals. While I save in categories of ‘retirement’ and ‘house down-payment’, I don’t know how to save for other, smaller goals.

For example, I have a block of money (let’s say $1,000 for math ease) saved without a specific purpose. I would like to take a trip next year (say $500) and replace my aging computer ($1,000 for the model I really want, but $500 for one that would meet my needs). I also realize in the future I want to take a class ($300).

How would you recommend divvying up my current block of cash and continuing to save towards my goals, both current and those that may come up in the future?

I don’t like the idea of having 20 accounts that get $10/month added because my needs and desires change, but I need more than a single pot.

Right now I don’t want to use any of the money because one goal realized is at the direct expense of another.

As an example of what I’m hoping for, what I’ve opted to do for those non-regular, but not unexpected expense is create an account called budget overages where surplus can be dropped or money pulled from with out guilt- a single category instead of a car category, medical category, insurance category, etc. It’s not my emergency fund to pull from frivolously but has a specific purpose, alleviating my anxiety of taking from it. Thoughts?

First I want to thank this reader for writing in. I love talking and writing about budgets!

I’m first going to try and summarize what I’m getting from this reader. They are diligently saving for major goals like buying a home and retiring. That’s good.

But they have these smaller things that pop up from time to time. These smaller things aren’t consistent — the reader doesn’t want to take a class every year and won’t need to replace the computer every year. The challenge is how to save consistently for inconsistent goals.

Saving for Small Goals

I’m going to do the best I can without knowing how much money the reader has left over each month as free cash flow. Hopefully with just using general example numbers this can help everyone reading this instead of just one reader.

Want to know how to save for small goals? It all comes down to prioritization. More on that in a second.

Before you can prioritize you need to know what you want to save for. In this example let’s just go with the new computer, the trip, and the class.

Rank Your Saving Goals

What is most important to you? This is the most important question of the entire process.  You need to write out everything you want to do over the next twelve months and figure out what comes first.

This is true of all goal-based saving not just small goals.

It also helps to know, generally, how much money you will have left at the end of each month to apply toward these goals. This makes planning a lot easier.

Going back to our example the reader might set their priority list like this:

  1. Take a trip – $500
  2. Replace computer – $500 to $1,000
  3. Take a class – $300

So any extra money that comes into the budget would flow down to these goals as listed. Once the trip was funded extra money then goes to the second goal, and so on.

But be careful — I am a firm believer in sticking to a plan unless something drastic changes. If you end up only having enough money to take the trip then you stick to your guns until you have the extra money for the other goals.

Balance Time and Money

There can be an issue when something with a later date is ranked above something that needs to be funded sooner.

For example in this instance the trip is next year sometime and the class is sometime in the future. Let’s just say the trip is in July 2010 and the class is March 2010. This represents a problem because the trip ranks higher in priority than the class.

In this instance the reader has a choice to make. Could both goals be reached? If so then it might be okay to fund the class first and the trip second. If not then the reader has already made a choice in setting up the list of highest priority savings. The trip is funded first and if there is enough money to get to #3, then so be it.

One Account, Many Goals

You don’t need 20 accounts to save for 20 goals. That’s overkill to say the least!

The easiest way I have found to save for multiple goals is to put all the money in one account. “But then it is just a big pile of money that I’ll spend!” Well that’s a spending control problem — fix that first.

But with all the money sitting in one account you can break up the money into “accounts” on a piece of paper or a spreadsheet. I’ve found this to be the best compromise — you can separate the money, but don’t need to remember 20 account numbers.

Save Extra Money Toward Goals

The reader also mentions having a “budget surplus” category. If money is left over at the end of the month from other categories that money is dumped here. When an unexpected (unplanned) expense pops up money is pulled from this account.

I think this is a decent idea, but I would tweak things a bit. We have a built-in category in our budget called “Miscellaneous”. We fund it for those things we aren’t expecting to buy on a monthly basis — membership dues, shampoo, and laundry detergent. We pull from this account when small unexpected things pop up.

If the reader is pulling from the budget surplus category to pay for wants rather than needs, I would discourage that. Set up a separate category for unexpected things. Then when you have money left at the end of the month from other categories dump that money directly toward your saving goals.

I’m always open for reader questions. Just drop me an e-mail!

{ 1 comment }

Leatrice July 12, 2011 at 9:05 am

Short, sweet, to the point, FREE—exactly as infmoratoin should be!

Comments on this entry are closed.