I am not a fan of borrowing money, so it’s important that I plan for and save for mid-range goals. I would define a mid-range goal as any major purchase or expense that I might have to make in the next 2 to 5 years.
Right now, we’re focusing on saving enough money to buy a newer automobile for me, some new furniture for our youngest child, and a sprinkler system for our lawn.
Obviously, some goals are more important than others. An automobile is more necessary than a sprinkler system. We try to create a list of reasonable goals, incorporate that list into our monthly budget, and save accordingly.
We only began to save for mid-range goals after we established an emergency fund. The money in the emergency fund is for unforeseen expenses.
Here’s our current system, one we’ve used in the past to successfully save for major purchases -
1. Using our monthly budget and my favorite budgeting tool, You Need A Budget, I create a budget category for each of our mid-range goals.
2. I estimate the cost of each future goal, over-estimating by 10% to account for inflation.
3. I calculate the number of months between the time I set the goal and the time I plan to make my purchase.
4. I divide the cost by the number of months, and this tells me how much to allocate, each month, to that particular budget category.
Here’s an example. If 36 months from now I want to buy a $12,600 automobile, I need to allocate $350 to that budget category, each month.
Now, I realize that this isn’t rocket-science. The real issue isn’t figuring out how much I need to save – the real issue is actually saving the money. Yes, it’s important that I plan for the future purchase. Yes, it’s important that I budget for the future purchase. But the most important thing that I can do, so that I can meet my ultimate goal of remaining debt-free, is to follow through, month-after-month, and stash that cash away. Which brings me to -
5. Each month, I make a “payment to myself” by depositing my allocations into my ING Direct Savings Account. I just make one deposit, for the total amount of all my mid-range goals.
I’m not overly concerned about the amount of interest my money is earning. I know some folks who use a CD ladder or other savings vehicle to save for these types of purchases, but I prefer a simple online savings account.
Having these mid-range goals incorporated in our monthly budget really encourages self-discipline. If it’s in the budget, it gets funded. If it’s not, it gets forgotten.
Final Note: I can – if necessary – use the money allocated for one goal to pay for another. The money is, after all, mine. The purpose of the various categories isn’t to box me it, but to keep me motivated. In effect, I’ve created a debt – a debt that I owe myself. Lucky for me, I don’t charge any interest!