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A key financial decision that many individuals grapple with is how to effectively allocate savings across multiple financial goals. Should you save for several objectives simultaneously, or tackle them one at a time? Essentially, there are two primary approaches to financial goal-setting:
Concurrently: This involves saving for two or more financial goals at the same time.
Sequentially: This method focuses on saving for one financial goal at a time, progressing step by step.
Each approach has its advantages and disadvantages. Here’s how to determine which method aligns best with your financial situation.
Sequential Goal-Setting
Pros
Focusing on one goal at a time allows for intense concentration and a gratifying sense of accomplishment upon achieving each target. Additionally, managing a single-goal savings plan is often simpler, requiring only one account to oversee.
Cons
One major drawback is that compound interest is not retroactive. If it takes years to address long-term savings goals—like retirement—you’re missing out on valuable interest accumulation during that time.
Concurrent Goal-Setting
Pros
By saving for multiple goals simultaneously, you can take advantage of compound interest sooner. The earlier you set aside money, the longer it has to grow. According to the Rule of 72, an investment can double in approximately nine years with an average return of 8 percent. Thus, the initial years of saving for long-term goals are crucial.
Cons
However, managing multiple financial goals can be more complex. You need to allocate income for each goal, often requiring separate accounts. This can also mean that it takes longer to reach any single goal since your savings are divided across various objectives.
Research Findings
In collaboration with Wise Bread, I conducted a study on financial goal-setting published in the Journal of Personal Finance. The focus was on young adults, with 69 percent of participants under 45 years old. We examined four key financial decisions: financial goals, homeownership, retirement planning, and student loans.
The results revealed that many respondents preferred sequencing their financial priorities rather than funding them concurrently, often delaying homeownership and retirement savings. Phrases like “once I have…,” “after I [action],” and “as soon as…” were frequently mentioned, indicating a reluctance to pursue certain financial goals until others were achieved.
The top three financial goals identified by 1,538 respondents were saving for something, buying something, and reducing debt. Approximately 32 percent had outstanding student loans, which significantly influenced their financial decisions. Nearly three-quarters reported that student loan debt impacted both housing choices and retirement savings.
Actionable Steps
Based on the study’s findings, here are five strategies to enhance your financial decision-making:
1. Consider Concurrent Financial Planning
Rethink the conventional approach of completing financial goals one at a time. Concurrent goal-setting can maximize the benefits of compound interest and help avoid the common pitfall of letting one goal’s completion dictate the start of saving for others.
2. Increase Positive Financial Actions
Amplify any positive financial habits you already practice. For instance, if you’re currently saving 3 percent of your income in a retirement account, consider increasing that to 4 or 5 percent.
3. Decrease Negative Financial Habits
Identify and reduce costly behaviors that hinder your financial security. Everyone has their own challenges; focus on potential savings, health impacts, and personal satisfaction.
4. Save Something for Retirement
It’s concerning that nearly 40 percent of respondents reported saving nothing for retirement. The actions you take today will significantly impact your future. Even modest savings, like $100 a month, can accumulate over time.
5. Run Some Financial Calculations
Utilize online calculators to set financial goals and devise plans to achieve them. Planning enhances your sense of control over finances and boosts 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 most crucial aspect is taking proactive steps. Weigh the pros and cons of both concurrent and sequential goal-setting strategies, and adopt a regular savings plan that suits your needs. Every small step counts!
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