A reader asked me a great question:
“How should I save if I don’t have a specific goal in mind?”
“Your budgeting template recommends figuring out what your goals are and basing your budget around it.”
“But I don’t have any specific goals – there’s nothing I’m saving for. So how should I save?”
Great question. First, some background for the other readers:
The cornerstone of budgeting is figuring out what your goals are, figuring out what your time frame for those goals are, and working backward from there.
If you want to throw a $10,000 wedding in 20 months, you need to save $500 per month.
If you want to contribute $30,000 towards your child’s education, and your child will go to college in 10 years, you need to budget $3,000 per year, or $250 per month.
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But what happens when you have no goals?
First: Save an emergency fund.
This is cash on hand – in a savings account – that you can tap in case the unexpected happens – like you lose your job. Or you break a leg and wind up with a huge hospital co-pay.
If you don’t have any dependents, your emergency fund should be 3-6 months of living expenses. If you have dependents or if you work in an unstable industry, extend that to 6-12 months.
Second: Anticipate Your Future Costs.
Eventually, your car will break down. It will need repairs and someday it will need to be replaced. This shouldn’t come from your emergency fund; this should come from a specific fund that you’ve set aside towards car repairs and replacement.
Sure, you want to squeeze every last mile out of your car. You want to drive it until the odometer tops 300,000 miles. But eventually, you’ll need a new one – so start making monthly car payments to yourself.
Apply this same discipline to all the objects you need to replace: your computer, your roof, your carpet, your water heater.
Third: Invest for Retirement
These are the two most important facts to remember about retirement:
The younger you are, the more benefit you’ll get from each dollar you invest in a retirement account.
You’ll never be younger than you are today.
Fourth: Think Short-Term, Mid-Term and Long-Term
You should direct money based on whether you’re saving for a short-term, mid-term or long-term goal.
A short-term savings goal (something that will happen in the next 1-5 years) should be put into a savings account, laddered Certificates of Deposits or a money market fund.
A medium-term goal (5-10 years) can be invested in bonds or conservative mutual funds.
A long-term goal (10-15 years or more) can have more stock market exposure.
If you don’t have a specific savings goal in mind, try dividing your savings equally among all three time frames.
But only do this AFTER you’ve completed the above three steps: building your emergency fund, anticipating your future costs, and maximizing your retirement accounts.