The words "financial goals" may sound a bit intimidating. In the simplest sense these goals are what you hope to achieve over the short-term, mid-term, or long-term. A part of your financial goals will include saving and investing.
Understanding your saving/investing goals in many ways mirrors taking a vacation.
You pack your bags, calculate your budget, and plan your trip. This is all based upon what you want to do at your destination, how long it will take you to get there, and what you'll do when you arrive. Now, transfer that idea to saving/investing goals.
How Savings & Investments Differ
Although the word "savings" can be used broadly, it's helpful to consider how it differs from the term "investments" when it comes to setting your goals..
| Savings | Investments |
| Used for Short-Term Goals | Used for Mid-Term & Long-Term Goals |
| Easily accessible; typically no penalties for early withdrawal | Interest bearing accounts; may incur penalties for early withdrawal |
| Lower interest rates (low return) | Higher interest rates (higher return) |
| Safe | Can involve risk |
TIP! Is it an investment or simple saving? Ask Yourself?
- How much money will I try to accumulate (or keep) in this account?
- How often will I need to withdraw money from this account?
- How many months/years do I expect to keep money in this account?
| Type of Account | Interest Rate | Restrictions | Balance | Best For |
| Basic Savings Account |
Typically low, fixed rate |
Few, if any, restrictions. |
Often no minimum |
Short-Term Goals |
| Debit Card Savings Account |
Typically low, fixed rate |
Few, if any, restrictions. May require a checking account at the same institution. |
Often no minimum |
Short-Term Goals |
| High Yield Savings Account |
Typically low, but variable rate |
# of withdrawals |
Minimum balance |
Short or Mid-Term Goals |
| Money Market |
Variable, changes with prime interest rate |
# of withdrawals |
Minimum balance |
Mid-Term or Long-Term Goals |
| CDs (Certificate of Deposit) |
Higher interest rates; varies with length of CD maturity date (# days or months) |
Penalties for early withdrawal |
Varies with length of CD maturity date (# days or months) |
Mid-Term or Long-Term Goals |
| IRA & 401K |
Varies |
Stiff Federal penalties for early withdrawal and possible income tax consequences |
Varies |
Long-Term Goals |
Making Money From Your Money: Understanding Interest
For every dollar you save or invest you hope to earn interest. Interest is often defined as the return on an investment. It is the amount the financial institution pays you for depositing and maintaining your money according to the account terms. The interest rate is the percentage paid or earned on the amount. Following are two of the most common ways to earn interest on a savings or investment.
Simple Interest
The interest is calculated only on the principal each time period. The interest earned in each time period is the same.
Compound Interest
Your principal earns interest. Then you earn interest on your previously accumulated interest, too.
Compound interest means the amount of the interest you earn is added to the principal, increasing the total amount available for earning future interest. You are earning interest on your original principal PLUS the interest from previous time periods. In other words, your interest is earning interest, too. (To compound means to combine.)
When shopping for compounding rates at various financial institutions, be sure to identify the number of compounding periods. For example, if two interest rates are the same, daily compounding will have a higher annual percentage yield (APY) than the quarterly compounded APY because there are more compounding periods.
| Example: | Simple Interest | Compound Interest |
| Principle Earning 6% Annual Interest |
$100.00 |
$100.00 |
| 1st Year Interest Earned |
$6.00 |
$6.00 |
| 1st Year Total Principle & Interest |
$106.00 |
$106.00 |
| 2nd Year Interest Earned |
$6.00 |
$6.36 |
| 2nd Year Total Principle & Interest |
$106.00 |
$112.36 |
| 3rd Year Interest Earned |
$6.00 |
$6.74 |
| 3rd Year Total Principle & Interest |
$106.00 |
$119.10 |
| Total Interest Earned in 3 Years |
$18.00 |
$19.10 |
IMPORTANT! The key to taking advantage of compound interest is leaving the money alone (no withdrawals) so it continues to grow exponentially.
Double Your Money: The Rule of 72
This rule that allows you to calculate how long it will take your money to double by dividing 72 by the expected return.
For example, if you are expecting a 6% annual return on your investment, you would divide 72 by 6 to get 12. It would take twelve years for your money to double in this investment.
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