A key financial decision that many people struggle with is how to allocate savings for multiple goals. Should you save for several goals at once or fund them individually in a series of steps? There are two primary approaches to financial goal-setting:
Concurrently: Saving for two or more financial goals simultaneously.
Sequentially: Saving for one financial goal at a time through a series of steps.
Each method has its advantages and disadvantages. Here’s how to determine which method is right for you.
Sequential Goal-Setting
Pros
You can focus intensely on one goal at a time and experience a sense of accomplishment with each completed goal. Managing savings for a single goal is also simpler; you only need to maintain one account.
Cons
Compound interest cannot be retroactively applied. If it takes years to reach long-term savings goals (e.g., for retirement), you miss out on potential interest earnings during that time.
Concurrent Goal-Setting
Pros
With concurrent goal-setting, you don’t delay earning compound interest on savings for later-life goals. The earlier you save, the longer your money can grow. According to the Rule of 72, an 8% average return can double your investment in about nine years. The initial years of saving towards long-term goals are particularly impactful.
Cons
Managing multiple financial goals is more complicated than focusing on a single goal. You need to allocate and often separate income for each goal into different accounts. Consequently, it may take longer to complete any one particular goal as savings are distributed across various objectives.
Research Findings
In collaboration with researchers, I conducted a study on financial goal-setting decisions published in the Journal of Personal Finance. The target audience was young adults, with 69% of the participants under the age of 45. We explored four major financial decisions: setting financial goals, homeownership, retirement planning, and managing student loans.
The results showed that many respondents preferred to sequence their financial priorities rather than fund them all at once, often delaying homeownership and retirement savings. Phrases like “once I have…,” “after I [action],” and “as soon as…” were frequently noted, indicating hesitance to pursue certain financial goals until others were met.
The top three financial goals reported by 1,538 respondents were: saving for something, buying something, and reducing debt. Approximately one-third (32%) of the respondents had outstanding student loans, which significantly impacted their financial decisions. Around 75% of participants stated that loan debt influenced both their housing choices and retirement savings.
Actionable Steps
Based on our findings, here are five suggestions to improve financial decision-making:
1. Consider Concurrent Financial Planning
Reevaluate the approach of achieving financial goals one at a time. Concurrent goal-setting maximizes the benefits of compound interest and avoids the common issue of letting the completion date of one goal dictate the start of saving for others.
2. Increase Positive Financial Actions
Enhance any positive financial practices you are already undertaking. For instance, if you currently save 3% of your income in a SEP-IRA (if self-employed) or a 401(k) or 403(b), consider increasing your savings to 4% or 5%.
3. Decrease Negative Financial Habits
Make the decision to stop (or at least reduce) costly habits that undermine your financial security. Identify the specific habits that hold you back, weighing potential savings and personal enjoyment.
4. Save for Retirement
Nearly 40% of respondents were saving nothing for retirement, which is concerning. Today’s actions significantly influence your future. Remember, any savings is better than none; even modest amounts of $100 a month can accumulate over time.
5. Run Financial Calculations
Utilize online calculators to set financial goals and devise plans to achieve them. Effective planning enhances your sense of control over your finances and motivation to save. Helpful tools can be found at FINRA and Practical Money Skills.
What’s the best way to save for financial goals? It varies. Ultimately, the key is to take positive action. Evaluate the pros and cons of concurrent versus sequential goal-setting and follow a savings strategy that suits you. Every small step counts!
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