Defining your goals

We all have goals: things we’d like to do. Often these are going to require at least some amount of money to achieve.

If you have already:

โœ… Made a budget ๐Ÿงฎ
โœ… Paid off any short-term debts ๐Ÿ’ณ
โœ… Sorted an emergency fund โ˜”

…then the next step is to think about your goals. As you start to save, it is helpful to quantify what you want to save for.

What are your goals? โœ๏ธ

While you may already have a detailed life plan, it’s also totally normal not to have an answer prepared for this question!

Start by simply listing everything you think you might be interested in. Don’t worry at this stage about how to achieve or prioritise them – this is an exploratory step and you can refine your list as you go over it.

Examples of goals could be:

How much will it cost? ๐ŸŽฏ

For some goals, you may be able to put a cost and date on them with relative confidence. For example:

  • ๐Ÿ–๏ธ Summer holiday: ยฃ900, August
  • ๐Ÿ“ฑ New phone: ยฃ400, in six months
  • ๐Ÿš— Car: ยฃ5,000, likely around 2 years from now

For other goals, the time and cost may be uncertain, or open-ended. For example, you may know you want to save a house deposit so you can buy a house one day, but not yet know when you’re likely to end up buying or or what it’s likely to cost.

For these goals, record any other markers you have for your goals’ success. For example, ‘deposit for a 2-bed house in my area‘, or ‘a total retirement income of ยฃ25,000‘.

You can then begin to calculate how much money you are likely to need to fulfil this goal. Don’t worry if it’s really approximate. We have some guides to help you:

  • For saving to buy a home, see our page on mortgages, which will help you calculate how much you can expect to borrow, and thus how large a deposit you require.
  • For retirement savings, see our pensions page for an explanation of how pensions work and how much income you are predicted to receive in retirement based on your contribution levels.

How much do you need to start putting aside? ๐Ÿงฎ

Your next step is to turn each goal into a monthly payment. Then you can see what they all add up to, and if necessary, adjust them to fit your budget.

For goals that are short term and well defined, simply divide your target amount by the number of months left until you need the money. In the above example that would be:

  • ๐Ÿ–๏ธ Holiday: ยฃ900 รท 9 Months = ยฃ100 needed to save per month
  • ๐Ÿ“ฑ Phone: ยฃ400 รท 6 months = ยฃ66 needed per month
  • ๐Ÿš— Car: ยฃ5,000 รท 24 Months = ยฃ210 per month

If you don’t have an exact date or amount, use an estimate.

If your goal is more than 5 years away, you are likely to want to invest your savings to benefit from some growth. You can use a compound interest calculator to see what monthly payments of ยฃ50, ยฃ100, etc will add up to in your expected timeframe.

Review and adjust โš–๏ธ

Looking at all your goals and their monthly payments together, you are likely to realise that you can’t afford to save for everything you want all at once. If so, you may have to make some adjustments to your plans, especially to costs or timeframes.

Prioritising how to use your financial resources is a tricky exercise, so take your time. There is no ‘right’ answer for how much you should save for what goals. It’s up to you how you use your time and money.

โš ๏ธ Note it may be tempting to assume that once your current short term goals are over, you will then be able to attend to your long term goals, with ยฃยฃยฃ per month freed up to do so. This can make sense with large goals like saving for a deposit for a home, but for smaller goals, our experience is there’s always something. It’s safer to assume that you will continue to spend as much on electronics, vehicles, holidays etc in the future as you do now.

Set up savings accounts ๐Ÿฆ

In terms of your savings strategy, the most important factor is when you will need the money by.

Short term goals (under 5 years) ๐Ÿ•’

Ff your goal is within 5 years, investments are not generally recommended. This is because the value of your investments can fluctuate up and down, risking your ability to pay for your goal at the time you need it.

  • For keeping track of smaller goals, your bank account may offer savings ‘pots’ to help you assign money to specific purposes.
  • To find the savings accounts with the highest interest rates, check the Top Savings Accounts list on Money Saving Expert, which is kept reliably up to date.
    • That MSE page includes easy-access accounts (you can withdraw any time), notice accounts (you need to give 1-6 months’ notice to withdraw) and fixed accounts (your money is inaccessible for until the end of the fix)
  • Another option is Premium Bonds from NS&I, the government’s bank. These accounts don’t pay a set interest rate, but for larger savings amounts the ‘prizes’ are competitive with bank savings accounts, and they offer a small chance of a big lottery win. Premium Bond winnings are also tax-free, which is particularly useful for higher earners with a reduced Personal Savings Allowance.
  • Another tax-free option is a cash ISA. Again, MSE have an up to date list. The rates are usually not as good as savings accounts, but if you would otherwise pay tax on interest then these may still come out on top for you.
  • If you’re saving for your first home, check if you’re eligible to use a LISA to boost your savings by up to ยฃ1,000 per year.

Long term savings (5 years or more) ๐Ÿ“†

If your goal is more than five years away, you should consider investing the money to achieve greater growth than is possible using savings accounts. The further away your goal is, the more valuable investment returns will be as their growth will compound over time.

Start with Investing 101, and from there ISA, LISA or Pension to choose the most appropriate and cost effective account type for your situation.

Interest rates are so poor! Are you sure I shouldn’t invest? ๐Ÿ“‰

People are often surprised at how little growth they can receive on their savings using bank accounts or premium bonds. It can sometimes be tempting to search for better returns elsewhere, especially if you worry that your goal will get more expensive while you’re saving up.

The important thing to understand is that savings held with a bank (or NS&I) are risk-free. There’s no scenario in which you save ยฃ1,000, then your account goes down to ยฃ900 on its own.

In contrast, investments can be very volatile in the short term. Market fluctuations happen regularly and the value of your investments can rise or fall daily.

The shorter the time period you invest for, the higher the chances that the final value of your investments could end up below the amount you put in. Meanwhile, the longer you invest for, the more confident you can be that your investment returns will achieve expected averages, as the good and bad years even out. This Monevator post has some useful statistics.

Five years is around the minimum length of time where investing starts to make sense, i.e. the chances of ending up with less than you put in become low enough to assume you will be able to proceed as planned.

More resources ๐ŸŽฌ

Check out the video below by Meaningful Money for more information on setting your financial goals.