Chapter 3: Mid-term Goals

Mid-term goals are achieved within one to five years. To determine the total cost and amount you need to save per month, you can use the method just described for short-term goals or use the method that is described in detail in the long-term goals section. This method takes into consideration the fact that the cost of most things rises over time due to inflation and that your savings will grow beyond your contributions if you earn a return on your investments. The math for the first method is much easier, but the second gives you more accurate numbers. You don’t necessarily need to go the extra mile to consider inflation and return for goals of smaller amounts that you plan on achieving in a year or two, but you may want to do it for high-cost goals with a longer timeframe.

Example 1
You would like to take your family to Disney World in year. Currently, the cost of the vacation is $2,000. You have not saved anything for the trip yet. Using the short-term goal method, you calculate that you need to save ($2,000-$0)/12 = $167 a month. If you use the long-term goal method (assuming an inflation rate of 3% and an interest rate of 1.5% on your savings account), you would need a total of $2,060 and have to save $170 a month. As you can see, because the timeframe is short and the amount saved is small, using the first method gives you fairly accurate numbers without needing to whip out a financial calculator to do the more advanced math of the second.

Example 2
You owe $11,320 in credit card debt ($5,000 on a card with a 12% APR, $3,320 on a card with a 15% APR, and $3,000 on a card with a 19% APR). You would like to be debt free in four years. To figure out how much you should pay, you can’t just take $11,320 and divide it by 48 months – you need take into consideration the fact that you are charged interest each month on your outstanding balance. This can be done with a debt repayment calculator. One is available at www.federalreserve.gov/creditcardcalculator. To be debt free in four years, you will need to pay $132 on the first card, $93 on the second, and $90 on the third. (* Note: Make sure your monthly goal amount covers at least the minimum required payment.)