Personal Finance 101–Set Priorities
Another component of the S.M.A.R.T. Action planning process is prioritizing. As mentioned earlier virtually every goal has some sort of financial obligation assigned to achieving it. If the goal is to buy a house, car, computer, or go on a vacation deciding which goal to take action on first generally depends on timing, costs, and desires.
Designing saving strategies to meet the goal’s financial requirement also depends on timing, cost, and desire. There are three popular saving strategies:
- Open up multiple saving accounts to save for multiple goals.
- Open up several saving accounts and save for only one goal at a time but use a savings snowball method.
- Use one saving account to pay for all goals.
Different methods work for different people. Method 1 works best for people who are organized and can manage multiple tasks. Method 2 works well for people who are very focused and want to create savings momentum. Successfully saving enough money to pay for one inexpensive goal in the beginning, creates a saving habits so more expensive goals are easier to achieve. Method 3, which rarely works in the long run, is best used by extremely analytical people with time to measure how close they are to each financial goal.
The typical downfall of using one saving account to pay for everything is:
- The amount saved for each goal is hard to determine.
- Saved money can be spent easily for the wrong reason.
- The reason for saving is forgotten.
- The total amount saved is often over inflated.
- It is hard to determine how close or far from the goal the savings are currently.
Each of the saving strategies above can be set up with a bank or credit union using automatic transfers. Each month a fixed amount can be moved into the appropriate saving account(s).