Goals-Based Savings Can Help You Withstand Market Volatility

By: Stacey Nickens

Financial planners and investment advisors have traditionally advocated for a bucket-approach to savings. With the bucket approach, you segment your savings by time until withdrawal. A goals-based approach to saving is a twist on this method. Rather than segmenting your savings by time until withdrawal, you will segment your savings according to your different goals. Doing so can help you juggle multiple savings goals, from buying a house to saving for retirement.

With goals-based savings, you will have separate savings accounts for each goal. When you contribute to each account, you will know the specific goal for which you are saving. This approach can make it easier to save. Instead of putting $200 in a 5-10 year savings bucket, you are putting $200 towards a down payment on a house. This mental specificity can encourage frugality.

The goals-based savings approach also makes it easier to make allocation decisions. Long-term goals can be invested in growth vehicles that may experience more volatility. These long-term savings accounts will have more time to rebound from a market drawback. Your short-term goals can be set aside in less volatile accounts. When the market goes wonky, you can rest easier, knowing your short-term needs are provided for and that your long-term savings will have time to recover.

With all of that said, let’s discuss some of different goals-based savings accounts and how you could allocate these accounts.

Unexpected expenses: These are your emergency funds, set aside for unexpected repairs or medical emergencies. Because you may need to withdraw these funds at any moment, capital preservation and liquidity should be your primary allocation goals. Accordingly, you may hold these funds in a bank account or in easily-accessible money market funds. You should work towards holding around six months’ worth of living expenses in this account.

Splurges: Suppose you want to go on an unexpected weekend getaway. Saving splurge money could make this possible. You would hold these funds in an easily-accessible account. To decide how much you want to have in this account, think about some of your common splurges. You can then set aside a little money each month for these goals.

If you receive unexpected gift money or a bonus, I encourage you to put at least half of those funds in your unexpected expenses and splurge accounts. Doing so can help those savings accumulate more quickly than they would have otherwise.

Big-ticket purchases: This account will be used for buying a house, renovating your home, or other large purchases. Your time horizon for this goal will determine how you allocate these funds. If you are looking to spend the money in the next five years, you may keep these funds in less volatile, easily-accessible accounts. Those with a five to 10 year time horizon may look at bonds with appropriate maturity dates or lower-risk equities, such as high-quality preferred stocks. Those with even longer time horizons could consider more dividend-paying stocks to help generate income for your goal.

Retirement: Your retirement savings bucket could be held in 401(k)s, IRAs, and/or Roth IRAs. Your allocation decisions will depend on your time horizon for retirement. Younger investors could put their funds in aggressive, growth-oriented stocks. These investors have plenty of time to recover from market drawbacks and could benefit from focusing on growth.

Those whose retirement is coming in the next decade could still consider investing in stocks. However, these investors may focus slightly less on growth and slightly more on stability. Accordingly, closer-to-retirement investors could look at investing in companies with long, healthy histories and at companies who pay a consistent dividend. Building up a passive income stream can help investors prepare to withdraw funds in retirement.

Finally, those in retirement could consider allocating their savings according to time horizon. For example, if you assume you will live for another 15-20 years, some of your money could be invested with an eye towards growth. You need some of your portfolio to outpace inflation, your withdrawals, and your tax burden. This portion of your portfolio will have more time to recover from market drawbacks and can be exposed to more volatility.

Funds you may need in the medium term could be invested in dividend-paying stocks or bonds. Dividend-paying stocks can help you generate income even if they are experiencing price volatility, so you could still benefit from this investment in a downside market environment. Bonds could similarly help you generate interest income.

Finally, funds you need in the near-term could be moved into a bank account. These funds won’t be exposed to market volatility, and if you know that your near-term needs are met regardless of stock market movement, volatility will likely feel less uncomfortable.

Need help? At Elm3, we will help you think through your financial goals and develop a savings and allocation plan that could help you reach those goals. Contact us if you want to start developing your financial plan today.