How to plan your finances for short-, medium- and long-term goals

If you find financial planning difficult, chances are you haven't organised your goals in a way that makes sense. One simple way is to line your goals up in chronological order, which will help you know what to focus your efforts on.

For example, say you're planning for a year-end holiday. Yet, you're behind on your emergency savings. Both goals matter, but without a financial planning strategy, you might end up overspending on your holiday, forcing you to dig into your emergency savings even more.

But if you line your goals up chronologically, you can make the choice to budget for your holiday first, and then focus on catching up on your emergency savings from January onwards.

Or, if that doesn't sit right with you because you believe emergency savings should be prioritised, then you can choose to delay your year-end holiday, and go for a springtime vacation instead.

Either way, you'd benefit — either from a fuller emergency fund, or a carefully planned holiday that doesn't bust your bank account.

The bottomline is, planning your finances needn't be complicated if you'd group your goals into short, medium and long term ones. Once you do that, you can put strategies and portfolios in place to help you work towards your money goals in a structured, elegant manner.

Deciding upon short, medium and long term

But first, what are short-, medium- and long-term goals? Simply put, they are goals that happen in chronological order, from most immediate to the far future.

Of course, we all have different priorities and want different things, so your list might differ. But generally, we can group money goals as follows.

Short-term goals

These are money goals that are needed immediately, and going without them can have detrimental effects on our lives. Some examples include:

Daily expenses, such as meals, utilities, housing and other bills. In fact, these should be considered immediate goals.

Emergency fund, sufficient to cover between three to six months of expenses.

Periodic expenses such as annual insurance premiums, medications and essential supplies.

Discretionary, big-ticket purchases, such as a family holiday.

Medium-term goals

Goals in this category would have a timeline between two to 10 years, and may often be one-time expenditures. Some examples include:

Long-term goals

This group of financial goals are typically the farthest away and have the largest sums involved. Most commonly, this would be your retirement fund, although others may also include lifelong dreams such as setting up a business or climbing Mt Everest, etc.

Financial portfolio tips for every goal

After you have organised your various wants and needs neatly, you can put a number to each goal. For example, you want to own a car in three years time, so you'll need to come up with a downpayment of at least 30 per cent of the total price of the car — which works out to several tens of thousands at today's sky-high COE prices.

Or, say you want to retire with a monthly income of S$3,000 in today's terms — how much will that be adjusted for inflation, and will your CPF Life be sufficient to cover this amount?

These numbers can seem daunting, but that's because you're looking at it through the lens of your salary. But with a bit of planning — and the right financial portfolios — you can have an easier time reaching your money goals.

Short-term goals: High-yield savings accounts, cash managed accounts

Approximate interest

• High-yield savings accounts: 0.05 per cent to 3.85 per cent per annum
• Cash managed accounts: 3.5 per cent to 4.5 per cent per annum

For financial goals with a timeline of a few months to a year, the main consideration is liquidity. That is to say, you want your funds to be available on short notice, so you should avoid anything that requires a long lockup period.

High-yield bank savings accounts are ideal for this purpose. Banks offer various ways to earn bonus interest if you make certain types of transactions each month, such as salary crediting, paying mortgages, or spending on your credit card. If you have an existing relationship with a bank, you might try looking into what else you can do to help your money grow faster.

Another option is a cash managed account, which pays high interest on your deposits without requiring multiple different transactions each month. You simply deposit your funds, receive interest daily, and can withdraw at any time with no penalty.

You can find such accounts offered by robo-advisers Sfye and EndowUs. Recently launched Chocolate Finance also offers a similar product. Importantly, note that these products are not savings accounts, and your principal sums are not guaranteed. That's because your funds are being invested on your behalf to generate higher returns.

Medium-term goals: Fixed deposits, endowment plans, bonds

Approximate interest:

• Fixed deposits: Three per cent to 3.5 per cent per annum
• Endowment plans: 3.4 per cent to 5.5 per cent per annum
• Bonds: Three per cent to 3.7 per cent per annum

For medium-term financial goals, consider fixed deposits, endowment plans or Singapore bonds.

Now, fixed deposits and bonds both offer more stability. In either, your capital sum is guaranteed and you will receive fixed returns if you commit to the entire duration. There's a bit more flexibility with bonds, as you can sell your holdings at any time.

As for endowment plans, your returns will depend on the type of endowment plan you actually sign up for. You can choose from short-term endowment plans with a lock-in period of three years or so — these will pretty much give you a fixed return as advertised.

However, for longer-term endowment plans, which may run for 10 years or more, you may receive a mix of guaranteed and non-guaranteed returns that could potentially result in a larger total payout at maturity. You can also opt for plans with guaranteed-only returns, but this means your overall payout may be capped at a comparatively lower level.

One undeniable benefit of long-term endowment plans is the disciplined approach they demand. You can pay small premiums at regular intervals to steadily save towards your money goal, while enjoying market returns.

Do note, though, that endowment plans carry heavy penalties for early termination, so you should only sign up if you're fully prepared to go the distance.

Long-term goals: Stocks portfolio

Approximate interest: 10 per cent per annum (based on S&P 500)

When it comes to long-term goals, the advantage you have is a long timeline. This will help you benefit from the power of compounding interest by capitalising on the stock market.

Now, understand this key point: Despite short-term noise, the market has always grown over the long term. The S&P 500, which Warren Buffet recommends the average investor should stick to, has been so consistent that we can safely assume an annualised return of around 10 per cent, given a large enough time frame.

What that means is that the earlier you start investing for retirement, the better your chances of having a more comfortable retirement. If you're lucky, you might even end up with enough to leave a legacy to the next generation.

There are plentiful choices, strategies and tactics when it comes down to long-term investing — too much to cover in this article. Suffice to say that as a general rule, you should aim for an average return of 10 per cent per annum, and anything higher is a nice bonus.

Of course, you can go for higher returns, but this also means having to accept higher volatility and a greater margin of error.

Bear in mind that the more time you have till retirement, the more risk you will be able to accept. However, as your timeline gets shorter, consider trading volatility for stability by adding fixed-income instruments to your stock portfolio.

Be sure to speak with a qualified financial adviser or professional to help clarify your questions and avoid costly mistakes.

ALSO READ: Best fixed deposit rates in Singapore (2023): DBS, UOB, HSBC and more

This article was first published in ValueChampion.