How to balance saving for short- and long-term goals
— -- Q: What percentage of an investors' portfolio should be for long-term goals, such as retirement, and what percentage toward shorter-term goals, such as buying a house?
A: Investors need to juggle multiple tasks at a time. Not only are there cars and houses to save up for, there might also be college costs and retirement plans with which to contend.
Learning how to prioritize and meet all your financial goals at the same time is one of the trickiest things to pull off. But learning how to do this is critical if you're to meet all your obligations.
Answering this question specifically is impossible, since everyone's financial situation is different. Income levels vary, as do financial goals. Houses in some parts of the country, for instance, are more pricey relative to incomes than others.
There are steps all investors can follow to create a plan. Those are:
•Create a list of goals. Do what financial planners do. Sit down and think about all the financial objectives you have. Do you want to help pay for your children's college? What kind of car do you think you'd like to buy? Do you plan to buying a house?
•Put price tags on goals. Depending on where you live, your goals might have very different costs. You can get help in estimating college costs at savingforcollege.com.
In terms of home buying plans, use sites such as Zillow and Redfin to come up with estimates. Don't forget about estimating your retirement objectives. Financial calculators from IFA.com, T. Rowe Price and Vanguard are all useful in helping put a price tag on retirement goals.
•Set a budget. Once you figure out what your financial plans will cost, it's time to get out pencil and paper. What you need are good budgeting techniques. If you need help creating a budget, Intuit's Mint.com (a Web-based service) or Intuit's Quicken (a software-based planning tool) can help you see where your money is going and how much you can afford to save.
Once you figure out how much you need to save for each goal, it's time to get realistic. If you're lucky, you have enough income to fund all your goals. But if not, you might need to make some adjustments. Perhaps you'll select a less expensive car in the future so you can apply more toward retirement savings.
Next, you can create accounts that are set up to maximize after-tax returns. For education savings, create a 529 account. For retirement savings, make sure you're getting the match from your company in a 401(k), if available. You can also look into setting up an IRA and Roth IRA.
Once you have all your investment accounts set up, make sure that the way you invest your money matches the goal. If you want to buy a car in the next six months, then you don't necessarily want to invest in risky stocks. If the stocks crash before it's time to buy the car, you'll need to take out a loan.
However, if you're young and saving for retirement, you can afford to take on more risk. Over a 30-year career, you can withstand the ups and downs of the market.
It's a big balancing act that will change over time as your income and goals may shift. But if you follow the basic framework, you should at least move closer to making most of your goals work for you.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
Related Stories
ABC News Live