Ask the grumpies: Saving concurrently vs. consecutively for big financial goals

Sandy L asks

Opinion. Pros and cons of saving concurrently vs consecutively for big financial goals.

Wow, this is a really intriguing question that I hadn’t really thought about before.  We talk a lot about this in terms of debt repayment– should you pay off debts concurrently vs. consecutively, and if consecutively, in what order, but I’m not sure I’ve seen this one addressed on the PF blogosphere in terms of savings.  I guess Dave Ramsey is like, get your emergency fund in order first, but after that… huh.

Because money is fungible, maybe in the grand scheme of things it doesn’t really matter.  If you’ve been saving up for a vacation and your car gets totaled, you can take money from the vacation fund (and the emergency fund) and put it towards the car.

Some money isn’t fungible though.  Should you save for retirement first and then 529s for the kids, or should you do both at the same time?  What about vacations?  What about houses?

I think really you have to do a bit of both, or if not both, then break up your savings goals into pieces and save them consecutively that way.  What I mean by this is, for example:

  1. Get some form of transportation to work and some form of housing.
  2. Save up an emergency fund of $X.
  3. Put enough in your retirement that you get the match.
  4. Save in an HSA
  5. Put some money in for a down payment (YMMV depending on your housing situation, income, etc.)
  6. Put more money in your retirement fund to what you “should” be saving given your years to retirement and income
  7. Save for a bigger emergency fund
  8. Max out retirement
  9. Finish saving for a down payment (YMMV) and buy a house
  10. Vacation fund (most people will put this earlier– I think of it as more of a luxury than 1-8, but some people are willing to make trade-offs)
  11. Start saving in a 529 for the kids
  12. Save for a new car
  13. Prepay the mortgage

and so on… [As always, YMMV and you should do your own research and/or talk with a professional prior to making major decisions]

Some of these will be maxed out each year (ex. retirement), but some are much more lumpy (ex. new car).  So you probably can’t do a lifetime of retirement savings before saving for other things unless you are extremely high income and low spending, but you may be able to max out your tax-advantaged funds each year.

Some people get really motivated for saving for vacations or cars or houses.  It’s possible that saving for these might work better in a savings snowball, one at a time.  On the other hand, cars and housing are generally more necessary than vacations, but vacations cost less than cars and houses and you might have to wait 10 or more years before going on a vacation if you put off saving until you have a downpayment.  If you save for the vacation first, you might end up going on too many vacations or you might take vacations too soon.  (Still, money is fungible and there’s nothing really preventing you from taking vacation money out of the house fund…)

Some saving needs to be automated because it just isn’t easy to save for otherwise.  It’s easy to do automated saving concurrently because it all happens without you paying attention.  In addition, changing up the automation requires attention, which means that you might not get around to saving for the next item on your list if you try to do automated saving consecutively.

[Update:  See some discussion in the  comments about diversifying risk vs. return for saving/investing goals.]

What do you think, Grumpy Nation?  What are the pros and cons of saving consecutively vs. concurrently?  What do you do?


18 Responses to “Ask the grumpies: Saving concurrently vs. consecutively for big financial goals”

  1. First Gen American Says:

    I’m more of a serial saver myself with the exception of retirement which most people save for right up until they retire. The main one I broke conventional wisdom on was paying off house before saving for college. It was mainly because our house was very cheap relative to our income so it was actually viable to do in a decade or so. Plus, we were also paying for 2 fulltime daycare expenses which was a huge money suck. Then we needed another house that my mom could live in with us, so it literally everything got pushed back 5 years.

    I do also have a separate chunk of change saved for a used car in case my company car ever gets taken away from me again, but then our “family” car is 10 years old, so I need to start thinking of that too.

    Saving for everything at once just seemed too complicated and there was not enough income to go around. Plus. I hate debt, so I wanted that gone more than I wanted a fat college savings account. I figured worst case we could pay as we go when the time comes…but that’s not without risk either as no one can time huge recessions, job loss and health problems…so that plan alone is not something that should be banked on. I also hate how imprecise that whole goal is. There is a pretty big between going to an in state school vs top ranked private univeristy where the margin of error is 6 figures. So maybe the real goal is to save for in state education and suppliment with current income when time comes. Still trying to work it all out.

    I will say that we have been very fortunate as we have been able to both work for over 20 years without an extended period of job loss (only 2 months) or other big expensive things like relocating for work or big illnesses. Some was good planning, but some was also luck.

    • nicoleandmaggie Says:

      It also makes sense to prepay the mortgage before saving for kids’ college given that your house doesn’t get included in most financial aid calculations but your 529s do. But the mortgage prepayment is a safe investment with a fixed rate of return while the 529 savings are generally riskier (though less so in the long run than the short run), so it’s good to get those started earlier in order to get higher returns over the child’s life.

      So I guess I should have included some discussion of risk and return in that discussion above. The fact that some of these are higher risk higher return investments and spreading them out over a long period makes them less risky while some are fixed savings that get eaten away by inflation… that suggests that maybe it’s best to do a mix of risky vs. safe at the same time in order to diversify risk/return.

  2. J Liedl Says:

    I save concurrently. However, the downside is that this kitchen renovation is likely not to happen any time soon, even though it’s been a dream for ten years (since we moved into this house). Why? Because the other savings goals are higher priority – a replacement car is more urgent than a new kitchen, etc. I’m also not going to dip into my emergency fund (especially not right now as we could go on strike in the next few weeks!).

    In this case, I’m so sad about not seeing a kitchen renovation anywhere in my future that I’m almost thinking of setting up a separate savings account that’s labelled “Kitchen” and see if I have the discipline not to use it elsewhere first (like on that dream family trip to Ireland or contributing to eldest’s wedding costs should that eventuality arise). Somehow, I doubt that I have that discipline.

    In the end, I’m always able to justify not holding onto kitchen reno money in favour of other priorities. The kitchen works, sorta-ish. It’s butt-ugly builder’s basic from 1989, but it works enough that shelling out tens of thousands for an update isn’t in the same league as paging the foundation or redoing the lockstone drive which has developed an interesting ripple or. . . . you see what I mean? But at some point, we’re going to sell this house and we’ll want an updated kitchen by then. Fifteen or twenty years down the road?

    • nicoleandmaggie Says:

      We need to do a kitchen renovation sometime too. I think we’re finally at the point in which we could, assuming a car doesn’t die. But it’s hard to let that go (also hard to get started). I guess the longer we put it off, the more likely it is to be relevant when we sell!

  3. SP Says:

    Some of both. Obviously retirement is concurrent with all others.

    For cash savings, I used to have little funds for every little thing. Now I have a few, because it helps me understand whether I really do have things taken care of. Property taxes are significant and paid only 2x a year, so I often have >$10k set aside for that in “savings” but I treat it as money already spent. A general emergency fund (don’t touch). A home maintenance fund for big house projects that have longish time horizons (roof or some appliance breaking, although a roof is expected to be so expensive that it overshadows any other small home emergency). Then a slush fund / short term savings where I accumulate mortgage pre-payments or vacation money (which we mostly cash flow). Last, a “targeted savings”. This is where I do serial savings for specific things like cars or prepping for kids. All this money is fungible, as you point out, but this money I mentally treat as fungible. It’s for big lumpy things.

    I still remember a post on IWTYTBR that suggested 20somethings worry about saving for diapers, and that didn’t make sense to me. For lumpy stuff, serial savings makes more sense.

    • nicoleandmaggie Says:

      We still need to figure out how to handle property taxes. I think we should probably start paying them every other year in order to reap the tax benefits now that the mortgage is gone, but we’ve been doing so much donating that maybe we should keep spreading it out. And we still haven’t gotten a donor-advised fund, which would also have tax benefits.

      • SP Says:

        That’s smart. Unfortunately I have a bazillion years of mortgage left, so I don’t think paying every other year would do anything for me. Donor advised fund is a bit out of my league for now, but very impressive.

      • nicoleandmaggie Says:

        Well, we can’t afford a house where you live. There’s a huge gap between housing here and there and our house value wouldn’t make a 20% down payment.

      • Debbie M Says:

        You could think about doing some of your donating every other year, too. I like donating monthly, but it costs me more to do that than to donate once a year, so now my plan is to donate for one year on the following January and the following year on December. There are exceptions for things like annual memberships. And of course it’s more polite to the charities to donate regularly rather than with lump sums.

      • nicoleandmaggie Says:

        We could if it weren’t all %#*%#ing public school and emergency stuff. Those are all sort of timely.

      • gasstationwithoutpumps Says:

        @DebbieM. Donating “regularly” to charities generally means annually—it is cheaper for them to process one payment a year than several smaller ones. Payroll deductions are generally grouped into one annual payment to the charity, even though they are taken out of each paycheck.

      • Debbie M Says:

        Interesting, gasstationwithoutpumps. I guess especially for my small amounts, annual donations are better than monthly. Yet some organizations (like public TV) are asking me for monthly (automatic) donations, so I assumed that was better. Maybe automatic donations are easy to process. Or maybe the increase in total donations they would get over the year more than makes up for the processing hassles.

        And now I’m even more annoyed at the high percentage my employer was taking for their part in payroll deductions. Let me once again recommend for a lower-cost way to donate anonymously.

  4. chacha1 Says:

    I save concurrently because retirement & HSA are automated through work and I don’t have to think about it. Of course this year I’ve barely been saving at all because we’ve been paying for house renovations. It will be interesting to see if we can really make progress next year, when we’re in the new place and paying much less rent.

  5. Linda Says:

    Let’s see, I can take all the child-related savings things out of the mix like daycare, college/529 saving, etc. since I have no kids and won’t ever be adding any. That removes one financial concern. I have an 8-year old Toyota for which I paid cash, and am hoping that my careful maintenance will give me several more years of transportation, barring an accident. (Touch wood!)

    I’ve been maxing out my retirement for the past 19 years. I’m eligible for “catch up” contributions this year and would love to add some extra to my retirement funds this year, but that’s probably not going to happen due to the unexpected expense of my eye surgery. (On the other hand, if the insurance company comes through with a reimbursement I know where I can place the “bonus.”) I’m not putting money in an HSA. My out-of-pocket expenses are high enough right now that I don’t want to switch to a health care plan that would make me eligible for it. I already max out my medical FSA and it can’t cover all my co-pays, etc. Getting old sucks.

    My EF has 6 months of expenses. I recently moved those funds into a higher interest CD since I have other targeted savings that could likely be pressed into service if I can’t break the CD or feel that I shouldn’t for some reason.

    I have multiple savings accounts for multiple objectives. It just works better for me that way. I have my “Annual Expenses” account into which I have automatically deposited enough money to pay the property taxes and my annual LTC insurance premium. Then I have accounts I’ve nicknamed “Goals” and “General savings.”

    The General savings account is where I get my paychecks direct deposited. (I know most people have that go to checking and then transfer, but I’d rather do it the other way around since it allows me to collect extra money at a higher interest rate until I figure out what I should use it for.) I used to have a nickname of “Vacation fund” on this account, but since I’m not taking vacations like I used to, I’ve renamed it. I may use some of that money for a vacation some year if I don’t have to keep using my PTO for medical stuff. The “Goals” account used to be where I kept my EF and was nicknamed as EF, but once I transferred out the 6 months expenses into a CD for the higher interest rate I renamed the account. There’s still some extra money in there, but not for long. I’m going to raid it for the house stuff I need done just in case we get a rainy winter again.

    I have a house, and my inability to make pre-payments right now is my biggest source of angst. I could likely make an extra payment every year, but right now I’m just being really cautious with my current target funds because that necessary house work is not a trivial cost. (I had money set aside, but ended up spending it on eye surgery, which was more important.) It’s possible I’ll move out of this house before I hit retirement age and locate somewhere with a lower cost of living, I guess. Otherwise I have to make adjustments to my financial plan or find a way to get my mortgage paid before I hit 80.

    Somehow I have to start saving for other big expenses like a car and/or roof replacement fund, too. Maybe next year. I’m really doing OK, even if I have to make compromises I didn’t have to make back in a lower cost housing market.

  6. Ask the grumpies: Retirement vs. college savings | Grumpy Rumblings (of the formerly untenured) Says:

    […] then all of this becomes extremely important.)  Here’s our most recent recommendation of what order to save for multiple big financial goals, and here’s our recommendation of what vehicles to use.  Finally, if you haven’t opened […]

  7. Ask the grumpies: Getting started with money | Grumpy Rumblings (of the formerly untenured) Says:

    […] of active managers (who get out-performed by the market). Here’s a couple of advanced posts on diversification of your overall personal portfolio (not just your retirement investments).  […]

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