How to save for short, medium and long-term goals

Staying motivated to save for an upcoming vacation with friends or a wedding may be easier than doing so for a far-off goal like retirement, since you’ll soon get to enjoy the fruits of your labor. But a key part of a strong financial plan is the ability to prioritize short-, medium and long-term goals and save for them simultaneously. 

There’s no exact timeline for these goals, but you can generally think of short-term goals as ones that you’re hoping to meet in three years or less, mid-term goals as those you want to hit in three to five years and long-term goals as ones that you’re hoping to see some to fruition in more than five years. Stashing money for all of those buckets consecutively can be challenging. 

“People get really overwhelmed when they think about their goals and where they should start," says Grace Beach CFP®, associate wealth management advisor at Russo Wealth Management in San Diego. But having a plan in place can help. 

Here are four steps to saving for various milestones, from that new pair of shoes to a down payment on a house.

1. Start with a strong foundation

Before you start saving for your various goals, you need to cover the basics. The first step is to build an emergency fund, which financial advisors tend to say should be enough to cover at least three to six months of expenses. That can vary depending on your specific situation—you may want to have more cash reserves if you have low job security or have unpredictable 

income, for instance. At this early stage, you should also prioritize paying off high-interest debt, such as credit card debt, Beach says. (Not only does this type of debt generate more interest owed than other forms of debt, like mortgages, but racking it up can also hurt your credit score). 

Growing your emergency savings fund could be in combination with contributing to your retirement savings via an employer-sponsored plan like a 401(k), says Catherine Valega CFP®, founder of Green Bee Advisory. If your company matches your contribution up to a certain amount, you want to make sure you’re contributing at least that amount. Otherwise, you’re essentially leaving free money on the table.

2. Prioritize your goals 

After you’ve covered the basics, review the rest of your goals, when you want to hit them and how important each one is to you compared to another. 

While saving up to join a new gym or take a cruise with your friends may have the tightest timeline, you probably don’t want to put all your savings towards those goals. You may want to split any extra cash between that and a downpayment fund, for instance. But if you have an aggressive goal like retiring at age 50, you may want to max out all your retirement savings accounts.This will look different for everyone, Beach says.

3. Choose the right savings and investing vehicles 

When saving for an emergency fund, you want to have this money somewhere you can easily access it, like a high-yield savings account (HYSA). There are also options like Current’s Savings Pods, which offers a bonus of up to a 4.00%, meaning you can earn some money even as you’re simply saving. If you use the Round-Ups feature, you can also build your fund with spare change from transactions. Members can also transfer money instantly between their Savings Pods and their spending balance, with no limit on the amount of transactions.

For other short-term goals in general, Valega typically points clients to cash and cash alternatives such as certificates of deposit (CDs), which allow you to earn a bit more interest than what you might see on a savings account in exchange for locking up your money for a certain period of time (typically three months to five years). She also suggests money market funds, which invest in low-risk, short-term debt securities like Treasury bills, as well as Treasury Bills themselves, which are issued by the federal government. It often depends on where you can find the best interest rates. 

For goals beyond five years, Valega likes to start investing that money. 

“For 3 to 5 years, we’ll do a mix of stock and cash alternatives,” she says. “Anything beyond five years—think retirement savings—I’m an aggressive stock buyer.” 

4. Create a budget and start saving 

Now that you have a plan in place, it’s time to actually start saving. Beach says to first look at your monthly expenses and income. Once you subtract your essentials such as utility bills, housing costs and groceries — as well as your “fun” spending — what’s left? The excess is your savings potential. 

Creating a budget can help, and there are several common strategies you can adopt and tweak for your own purposes. The 50/20/30 budget involves putting 50% of your income towards needs, 20% to savings and 30% to your wants. Meanwhile the zero-based budget requires that you attach every dollar to a specific expense, and what’s left can be put towards saving. And the envelope method allows you to create buckets for certain spending; you can’t spend beyond what’s in that bucket on any one category, and what’s left over can go towards your savings.