Here is your key takeaway: save for short-term expenses and invest for long-term wealth.
For the vast majority of folks, myself included, we should never look at investment "hacks" or tricks to gain wealth in the short term.
Most investment markets are way too volatile to take a short-term approach.
If you are saving up for something that you must pay off within five years, you must shift your mindset into savings mode instead of investing for that specific expense.
A Question From My Wife
We are currently saving money to open up my wife's bridal shop. In the meantime, my wife also started a wedding and event planning business with her former teaching partner.
My wife asked me on Friday, "How should someone save money for their wedding in 18 months?"
Since every situation is different, I cannot give specific advice. However, everyone can take some general steps to help save for an expense coming up within the next five years.
Step One. Write Out "Why" You Are Saving The Money.
A number should never be the end goal. As hokie as this may sound, this is a step that no one should ever skip.
Let's take two examples to illustrate why this is a necessary step. To keep up with the wedding theme, we will use that as an example as well as saving up for a down payment for your first home.
Wedding
"I want to save $20,000 for our wedding in 18 months."
Okay. That's great! But, why $20,000?
Crunching the numbers should be just a part of the equation. You may have determined that it will cost $20,000 to hire the specific caterer, the florist, and book the exact venue you want. But, if you are only concerned with the number, you will miss opportunities right in front of you.
So, what is a better "why"?
Try this:
"I want to save enough money, so we can have a stress-free (as much as possible) wedding planning experience and create unforgettable memories for my partner and our loved ones."
Having a more specific why that is not solely based on a dollar figure does two things.
One, it will keep you motivated when times become stressful. No matter how bulletproof you think you and your finances are, curveballs will show up.
They can come in the form of actual emergencies, or they can be more sneaky and take the form of self-doubt, depressed thoughts, anxiety, and fill-in-the-blank.
Knowing your "why" and being able to come back to it consistently because you have it written down will help keep you motivated during these down times.
The second thing that having a specific "why" outside of a dollar amount does is it allows you to be more flexible.
Saying that you will spend $10,000 on booking a venue because that is how much a good venue cost limits you.
Yes, you can set a maximum number for your spending but never set a minimum.
Knowing why you want the perfect venue may lead to you finding a venue for half the price you were planning on spending.
Down Payment On A Home
Just like the above wedding example, if you are saving up money for a home, why do you want to purchase a home?
I would strongly urge you to push past the thing too many people default to, which is, "buying a home is a good investment," or "I'd rather put money into something I own instead of paying rent."
There are many good reasons to buy a home, but you should not look at it as an investment in the traditional sense. Meaning, don't just decide to buy a primary home that you plan to live in for the next seven-plus years because you can later sell it for a higher price and make a profit.
Being a homeowner can provide you with a sense of security that renting may not. Also, living in a paid-off home can have wonderful psychological effects.
Find out why you want to buy a primary home before you start saving for that down payment.
Step Two. Yes - You Actually Need To Budget.
Before you click away from this article, I have already written about a couple of different ways to budget in an attempt to make it easier for you.
You can click here for a more in-depth method of budgeting, or you can click here to read about some simpler forms of tracking your money.
The main thing budgeting accomplishes is it changes all spending decisions into conscious ones.
Doing a one-time budgeting plan, even if it lasts just a week, will still give you valuable knowledge moving forward. It would show you where you are spending the bulk of your money and in what areas you need to improve.
My wife and I like to do the category approach when it comes to saving money and budgeting. The three biggest areas people spend the most money on are shelter, transportation, and food.
Out of those three categories, if you are saving for a short-term expense, generally the best way to save extra money is to focus on your food spending.
If you just want to do a budget for food spending alone (which can actually save a lot of people around $1,000 a month), take these three steps.
Calculate how much you have spent on food spending over the previous 3 months. Use past bank and credit card statements to help you do so. Include all food spending, which includes groceries and eating out. This will give you a current monthly average that you spend on food.
Set a new reasonable monthly goal and keep track of your spending along the way. I am passionate about saving money on food and have written multiple articles about such. If you need help meal planning for the week, here is the approach we use.
Adjust as needed. You will not get it right from day one. We adjust almost monthly and are never too hard on ourselves when we go over budget.
Step Three. Automate Your Savings.
Automation is how people get rich and how the rich get richer.
However, before I get too far into automating your savings, I should say that short-term savings goals should come after you have met your investing goal for the month.
Thus, if your goal is to invest 20% of your gross income for the future, generally it is best not to put money aside for short-term savings goals until you reach that 20% monthly investing mark.
Again, as I said before, these types of decisions are different for everyone. If you want more information on investing, you can start here.
Back to automating your savings.
First, find an online high-yield savings account (aka "HYSA") that you like. My wife and I enjoy Marcus by Goldman Sachs. Google is your friend here. You want an established bank that is FDIC insured and that offers a competitive interest rate.
This type of account is best if it's separate from your typical bank making it just a little harder to access.
Second, after you find the HYSA for you and started the budgeting process above, write down how much money you can start saving per month if you stick to your above budget.
Third, set up an automatic transfer once per month of the number you came up with to go directly into your new online HYSA. Most HYSAs make this process easy to do online. There should be an option that says something along the lines of, "Schedule an automatic transfer."
Step Four. Continue To Spend Less Than You Make
This seems obvious, but it is much harder said than done. Keeping your why in mind is the best advice I could ever give when saving and/or investing for your future goals.
If you always live as intentionally as possible, and you know why you are making the decisions you are, it is generally easier to stick to your plans.
Final Thoughts
Don't overcomplicate things. The process for saving money for short-term expenses is simple.
It's easy to stress out about what you should be doing differently.
But, you can only do two things to get you to your savings goals faster: 1) Spend less; and/or 2) Earn more.
There is one additional thing to be mindful of when starting a new savings goal. Saving and investing can become addicting. If you are not enjoying life in the present because of your newly adopted frugal ways, keep trying to find a balance between enjoying life today and saving/investing that works for you.
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