WBEZ and the Chicago Sun-Times are gathering your questions about all things money and finances. Then each week, we bring you answers from the people who know best.
Ben in West Town asked how you can maximize your savings.
“How do people move from short-term savings, plus a 401(k), to mid-term savings for unclear goals? I’d like to start investing toward a house beyond a normal savings account, and I’m not sure where to start.”
Be specific with your goal
Greg King, senior vice president and wealth adviser for Johnson Financial Group in Waukesha, Wisconsin, says it helps to be clear with your financial goals. Goals need to be specific and measurable.
“It’s like [on] New Years, the ball drops and you say, ‘I want to lose weight this year.’ That’s not really a goal, but if you said, you wanted to lose 15 pounds by April 15 — now we’re talking. We have a set date and how much,” King says. “Just like with a house, you should understand what type of house, condo, property that you’re buying; how much it’s worth and when you want to buy it.”
If your goal is to buy a home in three years with a $50,000 down payment, then you can do the math to figure out how much to save each month to reach that figure.
Consider investing
Once you’ve set a clear goal, try investing funds into things like money market accounts, certificates of deposit (CDs) or high-yield savings accounts — safe investment options that will help you reach your financial goal faster than a standard savings account.
“I certainly would not do stocks,” King says. “Stocks are not guaranteed. They’re extremely volatile. They could fall the month before you’re trying to buy your home.”
Follow the 10 and 10 rule
King says it’s healthy to practice having a surplus in your monthly budget, meaning spending less than what you bring in. To do that, you should look over your income and expenses and see what you can set aside toward savings.
“I think 10% for savings [and] 10% for retirement is a great number, if you can start right away,” he says.
But King says depending on your financial situation and goal, you may need to save more or less than 10%.
If you don’t have a clear goal or anticipate a large expense — like buying a home — in the next three to five years, King suggests putting that estimated 10% savings into a moderate or moderately aggressive brokerage account.
He says those who are at least seven years away from retirement, should also consider investing in an aggressive or all stock allocation in a brokerage account.
“You need to participate in the market because things like inflation really kick your butt in the long run if you just sit it in checking or savings,” he says.
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