From Dreams to Reality: How to Save for Mid-Term Goals 3-5 years from now.

Are you planning for a big financial goal that’s a few years down the road? Mid-term savings goals can seem daunting, but with the right strategies, they’re entirely achievable. Mid-term savings are typically longer savings plans something that you are thinking about achieving in the next 3-5 years down the road from the present day, These goals might seem harder to achieve because they are going to be larger amounts to save and have a longer length to get to the reward. It’s essential to have the right motivations and a solid plan to ensure success. If you ask me saving for these goals will not be achieved by adding money to the big pickle jar in the kitchen. You are going to need to find a savings vehicle that will work for you.

Why Mid-Term Savings Goals Are Important:

Mid-term savings goals not only help you avoid future debt but also empower you to achieve significant milestones without financial stress. So, what kind of goals are we talking about?

Here are some of my thoughts on what a Mid-term goal might be centered around –

These are all bigger expenses that can easily be funded through credit and create a lot of future pain points if you are not planning now for these future needs and wants. So you want to use some of those similar principles we have discussed in previous blogs. Like our Emergency Funds and Short Term Goals Blog and The Art of Savings. You will need to craft SMART-RR goals and talk to people about your financial goals and aspirations. These will help you stay motivated to reach your goals.

How to Save?

You need to determine not only the total amount required for your goal but also how much to save each month. Equally important is deciding where to save your money. Let’s explore the options available and how they might fit into your savings strategy. You can save your money in a variety of ways by adding it to a jar in the kitchen, using a savings account at a local financial institution, A Certificate of deposit, High Yield Savings accounts, or maybe an investment account. So what are the differences in all of these options and how do you decide on what is right for you and your money? The primary differences between these different options are going to be liquidity, cost, interest rates, risk tolerance, and when you need to access this money. The next question on which account is right for you and your money – Well I am sorry to say that this blog can’t answer that question for you, only you, your partner, and a trusted Money Professional (Coach, Counselor, Advisor, or planner) can help you answer that question. Why? The reason is that it's deeply situational and personal. There are so many factors that will be present in your situation and you want to review them all individually and in coordination of each factor. What I hope this blog can do for you is help you understand some of your options and educate you on what to consider when choosing how to reach your Mid-term savings goals.

But which savings vehicle is right for you? Let’s take a closer look at the pros and cons of different accounts.

Choosing the Right Account for Mid-Term Savings Goals: Pros and Cons

When saving for mid-term goals, it’s important to select the right type of account that aligns with your financial objectives, risk tolerance, and liquidity needs. Here’s a breakdown of various savings options, from the most traditional to those offering higher growth potential.

1. Jar in the Kitchen

Pros:

• Control: You have complete control over your money at all times, and there's no waiting period to access it.

• Visibility: Seeing the jar fill up can be a visual motivator, making your savings progress tangible.

• Liquidity: Your money is immediately available whenever you need it, with no withdrawal restrictions.

• Low Risk: There’s no risk of market fluctuations affecting your savings.

Cons:

• No Interest: Your money won’t grow unless you physically add more to the jar; there’s no interest being earned.

• Not Insured: If there’s a disaster like a fire or theft, your money isn’t protected.

• Temptation to Spend: Since the money is easily accessible, it’s easier to dip into your savings for other purposes, potentially derailing your goals.

2. Traditional Savings Account

Pros:

• Accessibility: Money in a traditional savings account is easily accessible, making it a good option if you need to access your funds quickly.

• Ease of Use: You can easily fund the account through transfers from checking accounts, and you likely already have an established relationship with your bank.

• Security: Funds in a traditional savings account are typically insured by the FDIC (up to $250,000), protecting your money in case of bank failure.

• Moderate Growth: While interest rates are usually low, your money will still earn some interest over time.

Cons:

• Lower Interest Rates: Traditional savings accounts often offer lower interest rates compared to other savings options, so your money won’t grow as quickly.

• Inflation Risk: The interest earned may not keep up with inflation, meaning the purchasing power of your savings could decrease over time.

3. High-Yield Savings Account

Pros:

• Higher Interest Rates: These accounts offer significantly higher interest rates than traditional savings accounts, which can accelerate the growth of your savings.

• Accessibility: Like traditional savings accounts, high-yield accounts are typically easy to access, though some may have limits on the number of withdrawals you can make each month.

• FDIC Insured: Most high-yield savings accounts are also FDIC-insured, providing the same level of protection as traditional savings accounts.

Cons:

• Online-Only Banks: Many high-yield savings accounts are offered by online banks, which might be less convenient if you prefer in-person banking.

• Withdrawal Limits: Some high-yield savings accounts may limit the number of withdrawals per month, potentially restricting access to your funds when you need them.

• Variable Interest Rates: The interest rate can fluctuate, meaning your earnings might decrease if rates go down.

4. Certificate of Deposit (CD)

Pros:

• Fixed Interest Rate: CDs offer a fixed interest rate for the term of the deposit, providing guaranteed growth of your savings over time.

• Higher Interest Rates: CDs typically offer higher interest rates than traditional and high-yield savings accounts, especially for longer terms.

• FDIC Insured: Like other bank accounts, CDs are typically insured by the FDIC, adding a layer of security to your savings.

Cons:

• Limited Accessibility: Funds in a CD are locked in for a specific term (e.g., 6 months, 1 year, 5 years), and withdrawing money before the term ends usually results in a penalty.

• Less Flexibility: Once you commit to a CD, you may not be able to add more money to the account; you can only invest what you initially deposit. This is dependent on the account stipulations so read the account information and ask questions.

• Inflation Risk: If you lock in a low interest rate and inflation rises, the purchasing power of your money could decrease over time.

If you want to consider investment options you want to look for an Investment Advisor, CHFC, or CFP to help you learn about your options in that realm. Investments can offer higher returns, but they come with risks. An investment professional can help you navigate these options based on your goals and risk tolerance. Look at FINRA Broker Check if you want to explore some of those options.  

Understanding the Rule of 72, Compounding Interest, and the Time Value of Money for Mid-Term Savings Goals

When you're saving for mid-term goals—those big-ticket items or financial milestones you plan to reach within 2 to 5 years—understanding a few key financial concepts can help you make informed decisions about where to put your money and how to maximize your savings.

The Rule of 72: How Quickly Can Your Money Grow?

The Rule of 72 is a simple way to estimate how long it will take for your money to double, based on a fixed annual interest rate. The formula is easy: divide 72 by the annual interest rate you expect to earn on your savings. The result is the number of years it will take for your money to double.

For example, if you have a savings account earning 4% interest per year, divide 72 by 4. The answer is 18, meaning it will take 18 years for your money to double. While 18 years may seem long, the rule helps you understand the impact of different interest rates on your savings growth. If you could earn 6% interest, your money would double in 12 years (72 ÷ 6 = 12).

For mid-term savings goals, understanding this rule can help you choose an account with an interest rate that aligns with how quickly you want your savings to grow.

Compounding Interest: Making Your Money Work Harder

Compounding interest is a powerful concept that can significantly boost your savings over time. It’s essentially earning "interest on your interest." When you leave your money in an account that pays interest, the interest you earn is added to your balance. In the next period, you earn interest on your new balance, which includes the previous interest.

Let’s say you invest $1,000 in an account that pays 5% interest annually. At the end of the first year, you’ll earn $50 in interest, making your balance $1,050. In the second year, you earn 5% interest on $1,050, not just your original $1,000, giving you $52.50 in interest. Over time, this compounding effect can significantly increase your savings.

For mid-term goals, look for accounts that offer compound interest, as this can help you reach your savings target faster.

Time Value of Money: The Sooner You Start, the Better

The time value of money is a fundamental principle that explains how the value of money changes over time. Simply put, a dollar today is worth more than a dollar in the future because you can invest it and earn interest. The earlier you start saving, the more time your money has to grow through compounding.

When planning for mid-term goals, the time value of money underscores the importance of starting your savings as soon as possible. Even if your goal is just a few years away, starting now gives your money more time to grow, and the impact of compounding interest will be greater.

Choosing the Right Savings Account for Mid-Term Goals

Now that you understand these concepts, how do you apply them to your mid-term savings? Here are a few tips:

1. Look for High-Yield Accounts: Choose savings accounts or investments that offer higher interest rates. Even a small difference in the interest rate can significantly affect how quickly your money grows.

2. Consider Compound Interest: Accounts that offer compound interest (daily, monthly, or quarterly) are ideal because they maximize the growth of your savings.

3. Start Early: The sooner you start saving, the more time your money has to grow, thanks to the time value of money. Don’t wait—start now, even if you can only save a small amount.

By understanding the Rule of 72, compounding interest, and the time value of money, you can make more informed decisions about where to save your money and how to achieve your mid-term financial goals. These concepts aren’t just for financial experts—they’re tools that anyone can use to make their savings work harder.

Taking Action on Your Mid-Term Savings Goals

Mid-term savings goals require careful planning, informed decision-making, and a commitment to your financial future. By understanding the key concepts of the Rule of 72, compounding interest, and the time value of money, you’re better equipped to choose the right savings vehicle and watch your money grow.

Remember, the journey to your mid-term goals won’t happen overnight, but with the right strategies, you’ll see your savings progress steadily. Start by setting clear, realistic goals, choose an account that aligns with your needs, and take advantage of compound interest to accelerate your progress.

Don’t wait for the perfect moment to start saving—begin now, and let time work in your favor. Your future self will thank you for the financial freedom and peace of mind you’re building today.