What is the first step in saving for a goal?

The first step in saving for a goal is to define your goal. Be specific about what you're saving for and how much money you need to reach that goal.

How do I determine my time horizon?

Your time horizon is the amount of time you have to save for your goal. Short-term goals typically have timeframes of 1-3 years, while long-term goals could be 5+ years.

Why should I adjust for inflation when saving for long-term goals?

Inflation reduces the purchasing power of your savings over time. For long-term goals, it's important to account for inflation so that your savings will be enough to meet future costs.

Should I save or invest for my goal?

The choice between saving and investing depends on your time horizon and risk tolerance. If your goal is short-term, saving in a high-yield account is usually best. For longer-term goals, investing can offer higher returns, but it comes with more risk.

How do I calculate how much I need to save each month?

To calculate how much you need to save monthly, you can use a formula based on your goal amount, interest rate (if applicable), and timeframe. You can also use online savings calculators to simplify the process.

OPTIMLY Guides | Saving Goal Guide

Goal based investing

Overview

Achieving a financial goal can seem daunting, but breaking it down into clear, manageable steps makes the process much simpler.

Whether you're saving for a home deposit, a dream wedding, or your child's education, a well-structured plan is key. In this guide, you'll learn how to set realistic financial goals, decide on your time horizon, account for inflation, and determine whether saving or investing is the best route for you.

1. Define your goal

The first and most important step is to clearly define what you are saving for. Be specific about both the amount you need and the purpose of the savings. Having a well-defined goal will help you stay focused and make it easier to create a realistic savings plan.

Key questions to consider:

What are you saving for?
How much do you need to reach your goal?

Examples:

Property deposit: - £30,000

This is a common goal for first-time homebuyers. The average price of a property in the UK is around £300,000, so a 10% deposit typically amounts to approximately £30,000. Depending on where you live, this amount may vary, so consider adjusting based on the average house prices in your area.
Wedding: - £10,000

The cost of a wedding can vary significantly, but the average cost in the UK is around £18,000 to £20,000. Many couples opt for smaller, more intimate ceremonies and aim to spend closer to £10,000.
School fees: - £120,000

Private school fees can be substantial. On average, yearly fees for private schools in the UK range from £12,000 to £18,000 per year. Over several years of education, these costs can add up to £120,000 or more.

2. Set your time horizon

Once you've defined your goal, determine when you want to achieve it. The time horizon affects how much you need to save each month and whether it's feasible to save or invest to reach the target.

Example scenarios:

Short-term goal (1-3 years): - Saving for a holiday, car, or home improvements.
Medium-term goal (3-5 years): - Saving for a a property deposit.
Long-term goal (5+ years): - Goals like a child's education, retirement, or larger financial commitments.

3. Adjust for inflation

If your goal is long-term, it's essential to consider inflation, which reduces the purchasing power of money over time. For most long-term goals, adjusting for inflation is crucial to ensure your savings will meet future costs.

The inflation rate typically ranges from 2% to 3% per year, depending on the country and economic conditions. Failing to account for inflation could leave you short of your target, even if you meet your nominal savings goal.

Formula: To adjust an amount for the effects of inflation, use the following formula:

Future value = Present value × (1 + Inflation Rate)^{Number of years}

Example:

You want to save £30,000 for a home deposit in 5 years, and you expect an average annual inflation rate of 2.5%. Using the formula:

Future value = £30,000 × (1 + 0.025)⁵

Future value = £30,000 × 1.1314 = £33,942.25

What does this mean?

Due to inflation, you'll need to save £33,942.25 to have the equivalent purchasing power of £30,000 today.

4. Decide whether to save or invest

Now that you know your goal and time horizon, decide whether you want to simply save or invest your money. The choice between saving and investing depends largely on your risk tolerance, the time horizon for the goal, and capacity for loss. While saving offers more security, investing typically yields better returns over time, as investments have the potential for higher growth, particularly over long-term periods. For more insights on this, see our guide to saving v investing.

Saving:

If your time horizon is short (under 5 years) or you want low risk, keeping your money in a high-yield savings account other savings product may be best.

Low risk: - No risk of losing money, but sujected to inflationary pressures.
Lower return: - Typical returns range from 3% to 5% annually.

Investing:

If you have a longer time horizon (5+ years) and can tolerate more risk, investing in stocks, bonds, or mutual funds could help you achieve higher returns.

Moderate to high risk: - You may experience market fluctuations, but investments generally grow over time.
Higher return: - Returns from a balanced investment portfolio can average 5% to 8% annually.

5. Run the numbers

Now that you know your goal, time horizon, and whether you're saving or investing, you can calculate how much to save each month.

Formula: The formua for calculating this is:

Monthly saving amount = Goal amount x r ( 1 + r )^nt - 1

Where:

r = Annual interest/growth rate

n = Number of times interest is compounded per year

t = Time, in years

Calculator:

Try our calculator to calcualte how much you might need to save each month to hit your goal. If you want more control, try our stand alone investment goal calculator.

Target amount:

Target timeframe, years:

Growth or Interest rate:

Monthly saving amount:

What does this mean?