Planning for short-term financial goals

Meagan Dow, CFA^®, CFP^®
Senior Strategist, Client Needs Research

We’re often so focused on getting to our final destination that we can forget to enjoy the journey. But our short-term financial goals are what add a spice to life that makes pursuing the long-term goals even more worthwhile, and an important focus of our webinar, "Balancing Long-Term and Short-Term Financial Goals".

What is a short-term financial goal?

A short-term financial goal is a goal or need you’re planning to pay for in the next few years. This could be a family vacation, home renovation, paying for a wedding, saving for a home down payment, buying a car or making another large purchase. We often lose sight of being as intentional about shorter-term wants and needs as we are about our longer-term goals, like retirement. And those in retirement can struggle to give themselves permission to use the money they've spent so long setting aside.

By incorporating a solid plan that considers different options for balancing and achieving your short- and long-term goals, you’ll be able to enjoy life now without compromising your future security. And this is valuable no matter what stage of life you’re in.

How do I plan for short-term financial goals?

1. Define your short-term goal
2. Determine how much you want to spend on it
3. Think about how quickly you'd like it done
4. Prioritize this goal within your other goals
5. Contact your financial advisor to help you run scenarios and think through funding

How should I pay for short-term financial goals?

Using savings or extra cash
Start by using funds you have intentionally saved for this goal. If that’s not enough, then consider cash you may have that’s above what you need for your spending and emergency savings. This cash likely isn’t earning very much, and it can be used to reduce the amount you’ll need to raise from other sources.

Borrowing
If you go the route of borrowing, using the debt strategically is key. Ideally, you’ll want to find a loan with a low interest rate and no or low fees. Also, consider attributes that can be easier to plan around, such as a fixed interest rate on a loan that amortizes and is paid off in a reasonable amount of time. And before taking on any debt, craft a plan for paying it off.

Selling investments
Selling your investments can help you achieve your short-term goal, but like paying interest on a loan, there are some trade-offs to consider. Just like with borrowing, you’ll want to work with your financial advisor to determine how selling investments may affect your other goals.

What if I have an emergency?

Not all short-term needs are fun. If something unexpected occurs (for example a major house or car repair, medical bill, etc.) you’ll want to use your emergency fund and extra cash first. If that doesn’t cover the full cost, consider whether to borrow or sell investments to cover the remaining amount.

Once you’re past the emergency, put a plan in place to rebuild your emergency fund for the next time you’ll need it. We generally recommend three to six months of total expenses for emergency savings.

What are my borrowing options?

Some of the most common borrowing options are credit cards, car loans, mortgages, home equity loans, personal loans and margin loans. You’ll want to determine which of these is the best option for helping finance your goal. For example, if you’re remodeling your kitchen, you may have thought of a home equity loan, but may not have considered if a margin loan could have been a competitive option.

A savings example

Marc and Jessica (both age 40) would like a $40,000 kitchen renovation and to retire at 65 with retirement income of $80,000. Here are some scenarios for balancing $2,500 of savings per month for them.

Disclosure: Graphic is a hypothetical illustration of different saving scenarios.

^{Source: Edward Jones.}

This chart illustrates three saving scenarios. The total monthly savings in each scenario is the same - $2,500. The difference: how it’s split between a kitchen renovation and retirement. In the first scenario, renovation is a priority, so $1,600 goes to that goal while $900 goes to retirement. Result: the goal of $40,000 for a kitchen renovation is met, while retirement would need to be postponed to age 66. In the second scenario, retirement is a priority, so $2,100 goes to that, while $400 is saved for the kitchen remodel. Result: the goal of retiring at age 65 is met, while only $10,000 is saved for the remodel. The goal in the third scenario: balance both retirement and renovation. So, $1,525 is saved for retirement and the rest, $975, goes to the kitchen remodel. The result: retirement comes a little later (age 65 1/2) and $25,000 is saved for the remodel.

Let a financial advisor be your guide

By incorporating a solid plan for achieving short-term financial goals, you’ll be able to enjoy life now without compromising your future security. Your financial advisor can walk you through the different options for balancing and achieving multiple goals, partnering with you to determine which may be the best for you.