How to Save Money for a Short-Term Goal

What Is a Short-Term Goal?

Short-term goals are ones you can generally accomplish within a few years—usually one to five. Some common types of short-term goals include:

• Building up an emergency fund
• Saving for a house down payment
• Buying furniture or appliances
• Paying for a vacation or cruise
• Paying off a credit card or other small debt
• Attending a wedding

On the other hand, long-term goals include saving for retirement or your child's college education. As you work toward those, it's also important to keep track of your short-term financial goals that can help you achieve financial security or accomplish more minor life goals.

Learn more: How to Set Financial Goals

How to Save Money for a Short-Term Goal

To achieve your short-term financial goals, you'll need to sit down and devise a game plan. Here's how.

1. Define Your Goal

The first step is to set your goal. What you're ultimately trying to achieve should be concrete, with a clearly defined savings amount you want to reach.

Calculate how much you'll need to achieve your goal. If your goal is debt payoff, for example, this might be your current credit card balance plus the interest costs you'll incur over the next few years. Alternatively, it could be the price of a flight, hotel stay and transportation for a vacation you've been dreaming of.

If your goal is to build up an emergency fund, total up your monthly expenses (housing, food and other costs) and multiply that by the number of months you'd want your emergency fund to cover. Financial experts generally recommend having at least three to six months of basic household expenses saved up for an emergency, but depending on your financial situation, you could start with a smaller goal.

Learn more: How to Build an Emergency Fund

2. Set Your Timeline

Next, establish the timeline for your goal. What is the date you need or want to have the money saved by? You may also want to set smaller goals within that timeframe to ensure you're making progress.

For example, if you want to save $10,000 for a vacation two years from now, you might set milestone goals of $2,500 every six months. This will keep you on track for your larger deadline.

Try to make your goal and timeline follow the SMART acronym: specific, measurable, achievable, realistic and timely.

Learn more: How to Set SMART Financial Goals

3. Adjust Your Budget

To consistently stow away funds for your goal, you'll need to establish a strict household budget and stick to it.

To create a budget, you should:

• Add up your monthly income. Be sure to include both yours and your partner's if you share finances with them. If you have variable income, you can look at last year's earnings and divide by 12 to get a monthly average.
• List your expenses. This should include essentials such as your rent or mortgage, car payment, food, student loan and other debt payments, as well as discretionary expenses and irregular expenses that come only occasionally.
• Look for savings opportunities. Analyze your expenses for areas you might be able to cut back spending on, and look at your income too. There's a chance you may be able to increase your income with freelancing, a side gig, asking for a raise or taking on extra hours at the office.
• Determine how much you can stow away each month. Use your budget to set spending limits and calculate how much you can afford to put toward your goal on a monthly basis. This will serve as the foundation for your savings plan in the next step.

Some people use the 50/30/20 method of budgeting, which requires you to spend 50% of your income on essentials, 30% on discretionary spending and 20% on savings and paying down debt. There are other budget plans that may also work, but it's important to choose one you'll stick to.

Learn more: 5 Types of Budget Plans to Know About

4. Create a Savings Plan

Next, determine how you'll execute your savings. Will you manually transfer money between your checking account and savings accounts every month? Will you open a new certificate of deposit (CD) account or buy a new bond every other quarter?

You could also set up automatic transfers to coincide with your paychecks. This ensures you're consistently making progress toward your goal, despite how busy life gets. (Just make sure you always have a cushion in your account. You don't want to get hit with overdraft fees.)

In some cases, employers may even allow you to split your paycheck. Doing so would allow you to deposit a portion of your check into your checking account and another portion into another account you designate. Talk to your employer's accounting department if this is something you're interested in.

Learn more: How to Create an Automated Savings Plan

5. Track Your Progress

You'll need to check in on your progress regularly to ensure you're staying on track. This is where having mini milestones can help. If you're meeting those, then you know you're on the path toward achieving your final goal.

Most banks have apps you can use to monitor your account progress digitally. You can also use budgeting apps that help you manage your spending and savings efforts from your phone. Some common ones include Pocket Guard, You Need a Budget and Goodbudget.

Learn more: Best Budgeting Apps

Where to Save Money for a Short-Term Goal

Choosing the right place to stow your cash can have a big impact on your ability to achieve your financial goals. Here are the options you might consider for your savings:

High-Yield Savings Account

A high-yield savings account (HYSA) is a type of bank account that offers a higher-than-average annual percentage yield (APY) when compared with traditional savings accounts. HYSAs typically offer easy access to your money, though some banks may limit how many fee-free withdrawals or transfers you get per month.

You'll typically find higher interest rates at online institutions than brick-and-mortar ones, as they have lower overhead costs and can pass those savings on to consumers. At the time of writing, some online banks were offering HYSAs with rates as high as 4.50%.

Learn more: Best High-Yield Savings Accounts

Money Market Account

A money market account (MMA) combines the functions of a checking account with a savings account. They offer interest-earning opportunities, but typically, there are strict rules regarding withdrawals and balances. You may be limited to only a certain number of transactions per month, or you may need to maintain a minimum balance in your account or incur fees.

MMAs tend to offer higher rates than traditional savings accounts. As of writing, the national average savings account rate was 0.39%, while the MMA rate average was 0.59%, according to the Federal Deposit Insurance Corp.

Learn more: Best Money Market Accounts

Certificate of Deposit

Certificate of deposit (CD) accounts typically offer even higher rates than both traditional savings accounts and money market accounts. The catch is you're not allowed to touch your money for a certain period of time—anywhere from a few months to 10 years, depending on the account term you choose.

With CDs, you'll need to wait until the maturity date to access your cash. Withdrawing money before then will typically result in an early withdrawal penalty. One way around this is to choose a CD ladder, which involves splitting your money into several CDs with different maturity dates. This gives you access to your money at regular intervals, while also allowing you to take advantage of the higher rates that come with CD accounts. A CD barbell, which requires a long-term CD combined with a short-term one, is another option.

Learn more: Best CD Rates

Government Bonds

Buying bonds is another safe way to build up your savings. Treasury bills, also known as T-bills, are one option, and they can earn you interest for periods of four weeks up to one year. As of writing, the average three-month T-bill was earning 4.36%.

Treasury notes are another option. These earn interest for every six-month period you hold them. Terms range from two to 10 years.

Learn more: Best Savings Accounts for Short-Term Goals

The Bottom Line

Having a good savings plan can help you achieve your financial goals. A good credit score can open financial doors too. Maintaining good credit is another way to expand your financial options. You can sign up for Experian's free credit monitoring service to make sure your financial health is always on track.