How to Set Up Money Management Systems for Short-Term & Long-Term Goals

Katie: Welcome back, #RichGirls and Guys, to The Money with Katie Show. I'm your host, Katie Gatti Tassin. And in today's episode, we are talking about setting up strong money management systems to run in the background of your financial life. The quote that immediately came to mind when planning this episode came from James Clear, the author of Atomic Habits. He says you don't rise to the levels of your goals, you fall to the levels of your systems. This is a nice way of saying that as much credit as we wanna give ourselves for being disciplined go-getters, the reality is that most of us, myself included, will not rise to the occasion consistently and impressively enough to accomplish amazing things willy nilly. Instead we'll get results that are consistent with the things that we habitually do. I'm tempted to make that predictable, healthy living analogy here that if your habit is waking up, going for a jog, and then coming home and eating scrambled eggs and green juice, and you do this every morning consistently, rain or shine, it's just part of your routine, you're probably gonna be in decent shape and feel pretty good. And if you have no semblance of a daily routine around exercise or what you're eating, and you're just leaving your fate up to the capricious whims of how you feel each day and what happens to be in the fridge, that it's a little bit like how people are trying to eat less sugar will keep less dessert and candy in their house. Like you're planning ahead for your own cravings and you are circumventing them by removing the temptation from arm's reach. 

So I was reminded of this in the money realm on a recent trip for which I forgot my water bottle, my phone charger, and snacks. So there I was stumbling around an unfamiliar airport, buying a $5 bottle of water, a half-empty bag of chips at a 40% markup, and a $35 phone charger that I later added to my collection of the 12 other identical ones I had at home. And as I tallied up my “I am frustratingly forgetful” expenses, I realized so much of the unexpected spending that I have to do just comes from a sheer lack of planning, not thinking ahead properly for a trip, not planning for meals before the week starts, and then leaving it up to my Monday afternoon mood to determine what's for dinner. Do I wanna cook something with food I already have? Or do I wanna get takeout? I can tell you which one's gonna win every time. Not thinking about the fact that owning a car probably means that at some point it's gonna need new tires or an oil change, and then being pissed off when the time finally comes and I'm out $400 unexpectedly. These are all the general life examples that are gonna vary person to person, but the broader framework should be applicable regardless of your situation. So today we're gonna get specific and we're gonna dive into some of the best structures that you can institute in your financial life to make sure you are hitting short-term and long-term savings goals with as little friction as possible.

So the goal is to have enough money at any time for whatever it is you want to do, for money to never be the reason that you have to turn something or someone down when you really wanna say yes, whether that someone or something is a last-minute vacation or an awesome birthday present for a friend, or an upgraded airline seat when you're really hungover and you just need to lie down. Not that that last one comes from a recent personal experience or anything. So let's talk short-term versus long-term saving. And this concept of deferred spending, because really all saving is is deferred spending. Whether you are saving for something you're gonna buy in 2023 or 2053, eventually all of the money you're saving is gonna be spent by someone—hopefully it's you.

So you can think of that deferred spending on two different timelines. And this is where the water gets a little bit murky, because there aren't hard and fast rules about what constitutes short and long. But I personally think of short-term savings as anything within the next 18 to 24 months. So two years out, really, at the longest, and anything long-term as being more than two years away. That means long-term is a much larger bucket, both in the breadth of the years that it covers and the size of that pot of money as a result. Now, before we go any further, I wanna help you visualize how you can think of these long- and short-term goals. So how should we do this? 

Ooh, okay. I got it. Can I get a bass line? Yes, this works great. Okay. You can think of the bass as your long-term goals. Drives the song and your finances forward with rhythm and stability. How about some drums? Okay, perfect. Yeah, the drums are your short-term goals, building in rhythm until you reach the goal of the crescendo. And then it locks back in and builds up again to the next one. To top it off, we need the accent notes, the flashy unknowns, the little short-lived fires that you have to constantly put out. Can I get some guitars, some piano? Yes. All right. You know, this is kind of sounding like the last song in a romcom. I think all we're missing is some “Woo, woo, woo”...

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Now that we're feeling all warm and fuzzy, it's a good time to dive into our first savings goal. That is the short term. These are the ones that technically require the more urgent planning; something that you need money for six months from now is definitely more of an urgent priority than something that you might need money for in six years from now. So we'll start here. We can set up systems in our finances that allow us to ensure the money that we need is always there for us. We can set it up such that we aren't leaving it to chance or stretching ourselves too thin at the last minute, because we failed to plan ahead. We're not gonna leave the metaphoric phone charger at home, okay. So for today's episode, I am gonna use Betterment's versions of these various accounts, because it's the brokerage firm that I am the most familiar with. This is not sponsored. It's just the one that I like the most, and the one that I think most clearly delineates between these various goals. And in case you're still deciding where to set up your systems, this will be like a little bit of a blueprint if you end up using that platform. But I will try to describe the account features as I go, so you could create something similar if you use another platform. 

So let's break down the framework for identifying which short-term saving goals you need and the tactical piece of how and where to save. So if you're wondering how a stupid anecdote about me buying a bottle of Evian at an airport connects to short-term savings goals, we have gratefully reached the point now where things are gonna dovetail. So let's figure out necessary short-term goals that we need. We'll start with an easy one: the emergency fund. You have likely already been badgered enough about this one, but just in case you haven't, the emergency fund or the cash cushion or the “oh shit fund” is a little bit like a fake zero, if you will. In other words, it's the minimum amount that you wanna have sitting aside in savings for true emergencies that are actually unpredictable. I don't wanna spend too much time here 'cause I know it's generally a given, but we'll say two to three months of baseline expenses is likely the sweet spot for most. For my husband and me, we like to have roughly $15,000 in our emergency fund, which is really just our checking account. And then anytime our balance drops below $15,000, that's a sign to me that something has gone a little bit off track. So $15,000 for us is our fake zero. That's like two months’ worth of expenses. And how I generally keep tabs on it is I will look at all of our outstanding credit card bills and any upcoming bills due, like our rent, so things that are liabilities for us, and I'll go, okay, do we have enough money to pay rent and the credit card bills where they currently stand? And then do we have an additional $15,000 left over? And as long as the answer is yes, I will just eyeball the difference and move any extra into our taxable brokerage account. I just keep our emergency fund and regular spending in the same accessible account because it's just easier for me, but that is not everybody's preferred method. Some people want the money earmarked for their emergency fund to be separate. And if that's the case, I think you can either keep it in the savings account that's hooked up to the checking account for easy liquidity if needed, or if you'd like to create more friction for yourself because you have a history of like tapping into it when you shouldn't be, you can just put it in a savings account at a separate institution so that there would be more of a delay between getting the money out of that account to actually be able to spend it.

Now let's talk about some of the other short-term goals. Again, I personally don't bucket my savings goals into different accounts. For example, I don't have like one account for a house fund, one account for a vacation fund. I just kind of treat my taxable brokerage account like a giant catchall savings vehicle for the future. But I know that that's probably inefficient, because it might mean that I have to sell when the market is down out of necessity, just to access the cash. Because I am currently employed, I usually have cash on hand from my income. So I don't necessarily recommend that catchall approach unless you feel like your cash flow is diverse enough to the point that it could cover surprises.

The idea here, though, is to think of the boring things and the fun things that you'll want or need to pay for over the next several months or years. But remember, we are generally talking 18 to 24 months or less, give or take. So I'll name a few common ones so that we can, you know, jog your memory, but you may have random interests like going to violin sleepaway camp or something. So you'll probably need to make your own list. Some of you may have income right now to the point that you don't need to plan to set aside money as you go for some of these things. Like if you need new tires that cost $300, you might have plenty of cash coming in on a monthly basis that you don't have to set aside $25 a month for 12 months to achieve that. 

But you'll probably have a good sense for the level of expense that would need to be planned ahead for, so let's do this, let's start with the car and the car-related expenses. If you already own a car and you don't have any plans to get a new one in the next two years, then you may wanna be setting aside funds for things like car insurance and maintenance. If it's covered by a warranty or it's already a monthly expense that you pay for that's baked into your budget, but you have plans to upgrade your car in a couple years, maybe you're setting aside money every month for that initial down payment. So as an example, let's say that I've got a three-year-old car that has two years left of its warranty and that my car insurance is $1,200 per year that I have to pay annually every year on January 1st. I would essentially look at that annual expense divided by 12 and set up an auto transfer for that amount into my car fund. I'd also probably think about the fact that that car is, say, an Audi, and will likely require a synthetic oil change for $200 every six months, and probably need premium tires that'll run me $200 a pop. And after factoring in these additional expenses, I could estimate that the car itself is probably going to run me an additional $1,200 per year in maintenance. So I would divide that by 12 as well and transfer more. So if you're keeping track, that is an expected $2,400 per year in car expenses that I don't necessarily know when they're going to hit, in the case of something like a tire, or maybe I do know in the case of something like insurance, but it's $200 a month that needs to be set aside and earmarked for that, transferred into this car savings account. So it's there and it's ready and it doesn't disrupt my cash flow if it comes up kind of unexpectedly when needed. I like this example because I think it applies to most people, but it'll apply differently depending on the type of car you drive, if you own or lease that vehicle, and how often you're getting a new one. 

Another popular example is vacations or travel. This is a really hard area, I think, for people to budget into their monthly spending, because we don't traditionally travel every single month in the same way for the same price. And if you've had a hard time in the past budgeting for travel, it might be easier to think about it on an annualized basis. So same principle applies. Maybe we're making $80,000 a year before taxes, and we're comfortable with spending $4,000 per year on travel. So 5% of our pre-tax income. I might not know when or how I'm gonna spend that $4,000, but I know it means that I need to be saving $333 per month into that travel savings account. A few other popular examples: clothing, gifts, attending weddings—the most expensive thing that most people in their twenties are doing on a regular basis. So basically think about this category of like the kind of bullshit you buy at Neiman Marcus, or the events that require you to fly across the country to some obscure location and bring a box from Williams-Sonoma.

You might not want to have a monthly shopping budget, because you don't know when or what or why you're gonna need to take a trip to the mall, but you wanna make sure the money is there if you do. So same principle as a travel example: You can determine up front with some vague level of specificity how much per year you are comfortable spending on that category, and then auto-transfer the money. So particularly with things like traveling for weddings, if you set a budget up front that you're comfortable with, then you have very clear parameters for which weddings to be attending and which to be politely passing on. So those are some examples of relatively short-term savings goals that may warrant their own accounts. These are things that you'd most likely wanna keep in cash or equivalents, maybe like I bonds, which we talked about a few weeks ago, because you don't want to risk the market doing something crazy in the short term and disrupting your progress. Because we're talking about these two-year or less timelines, the likelihood that any real compounding would really happen and be worth the risk that you're taking on for that reward is pretty low. So some traditional legacy banks are annoying about having certain rules around their savings accounts. Like you have to have a minimum balance, or you can only transfer money out a certain number of times per month, and they'll charge you fees if you don't meet the requirements. So I would keep that in mind and kind of pay attention to that as you're setting up these accounts. Speaking of spending, what happens in this framework when you use some of the money? Well, theoretically, nothing. You pull the money out that you need. And then the same automatic transfer happens the following month, putting some money back in. So in this way, you're kind of smoothing out the ups and the downs of variable spending. And you're preventing crazy months from throwing you totally off-course; you are falling to the level of your systems. 

This is normally the point at which someone will say, okay, yeah, you know, I've got my car insurance planned for, no problem. But what about things like houses and weddings, like the really big expenses that take years to save for, and aren't going to be funded from $200 to $300 per month in automatic transfers? And I'm not gonna sugarcoat this. If you have $0 to your name and you are planning to throw yourself a “My super sweet 16”-style, $80,000 wedding next year, unless you are raking in a shit ton of cash, that's going to be hard. Houses, weddings, other things that tend to cost tens of thousands if not hundreds of thousands of dollars, require something in between short-term cash and long-term investing planning.

So we're gonna call them “major medium term” for now, until I can come up with a fancier name. These are the things that will take more than a year or two to save for, but are happening much sooner than something like retirement. And therefore a retirement account is not the best or even a good way to save for them. And as you've probably realized by now, things come at you from time to time that you have to be able to absorb into your savings plans. And I wanna help with, you know, a visual about how you can accommodate those, so we can get that retro-sounding song again, please? Okay, great. So the song, your savings plans are in sync, the bandmates are all getting along, but sometimes you gotta switch things up, 'cause pop is selling more than like retro sixties jams, and then your drummer ultimately quits, but that's okay. You don't need him. Your bass player sticks around for a little while, but then also she decides she doesn't like the direction you're going in, whatever. And then your guitarist and your pianist follow her out the door. They were always unreceptive to your genius. Anyway, that leaves you with your synth and your drum machine, and the one thing that got you into music in the first place, the “woo woos.” A short time later, you are the one headlining Madison Square Garden (that'll show those guys), and they all love you. You didn't need them in the first place. God, I love having a podcast.

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Sorry, did I come off as bitter? I don't know where that came from. Definitely not a firsthand account. Anyway, when it comes to medium-term goals, which as I mentioned before the break are the things that tend to cost tens of thousands, if not hundreds of thousands of dollars, where your timelines are a little bit different from a super long-term goal, your risk strategy and allocations should be different as a result. I like the big purchase account that Betterment offers. It's technically just a general investing, like, taxable brokerage account, but you can bucket and name specific goals and answer a few questions about the desired timeline. And it'll basically invest the money for you in such a way that your chances are as high as possible to have the amount of money you need when you need it. So, in other words, if you were to open a regular general investing account with Betterment and tell the algorithm that you're gonna use the money to retire in 30 years, the algorithm is probably gonna put you in a 90 to 10 stocks/bonds split. But if you tell it that you need the money in your big purchase account in five years, you'll probably get like a 50/50 stocks/bonds split, or something even more conservative, something that'll grow more than cash alone, but it won't expose you to an undue amount of risk for the window of time that you're looking at. I imagine the other robo advisors work the same way, but this is the one that I'm familiar with. So that's why I'm using this example.

But of course the hardest part is actually putting the money in. So the same way that we plan for a travel expense, we can plan for something like this, just on a larger scale. If you need $50k in five years for a house that is $833 a month, that needs to be dumped into a big purchase account. And hopefully the growth in that account will help the $50,000 remain competitive over the five years that you're saving, and to some extent, keep up with the market, particularly if the market returns to a state of normalcy (prayers up). But I think this highlights something else. A lot of the time, these goals, especially these really big goals, they feel so vague and nebulous, but in reality, we can usually throw out a good guess at a number and work backwards based on the timing.

So to wrap up short and medium-term goals: In conclusion, the idea is that each time you receive a paycheck, some small portion of that paycheck is getting automatically transferred into these various cash reserve accounts or major purchase accounts that are dedicated and labeled for different things. You are budgeting for the amount you're gonna save for those things, and then building up cash reserves to deploy when you're ready. So it's up to you to determine what is an appropriate amount to spend on this stuff, because as you probably noticed, for the most part, everything we've been talking about are mostly discretionary expenses based on your income and your goals for retirement, but that sets the stage for the other major thing: our long-term savings goals, aka the thing that I talk about the most on Money with Katie. 

Retirement and long-term are kinda synonymous. It basically just means that below the surface of the money that's coming in and out on an annual basis, you are building a deep moat of wealth that you can draw on at some point in the distant future to quit your job or buy a boat or send your kid to college. The goal, obviously, is that by starting early and shoveling money into these investing accounts and digging this moat deeper and deeper, that by the time you actually need the money, you've got more than you know what to do with. The balance between the short-term savings, the long-term savings, and the regular monthly spending is the trick here. And the truth is that the more you can earn, the easier that balance is going to become. So when we talk about these long- term savings goals, we really have time on our side. The short-term goals are really not gonna benefit much from the power of the stock market, because the money is either gonna stay in cash and get spent before it would've had the chance to grow, even if it had been invested, and the medium-term stuff, like the house and wedding examples, might grow some over the example five year timeline if it's invested in a conservative mix of stocks and bonds, but you're not gonna 10X your savings in five years. But the long-term savings, those actually might be 10X over the decades.

Time is the most potent contributor to your long-term savings goals, which is why starting early is so helpful, because you're giving that potent ingredient all the power it needs to go to work for you. So we usually talk about and use 401(k)s and IRAs for these types of long-term savings goals, because they shelter those compounding returns from the degradation of taxes that would also compound over time, if not protected against. I've done plenty of episodes and blog posts about 401(k)s and IRAs. So I will spare you, but if you're able to also open a taxable brokerage account with a similarly long timeline, 30 to 40 years, you know, that will also help supercharge things.

So now you might be thinking, okay, Katie, I am thoroughly overwhelmed by the amount of stuff that you just threw at me. So I think it's time that we do a little summary example to really get the people going. So as you set up your financial systems with short, major medium-term, and long-term saving—or reminder, as I like to call them, deferred spending—goals, you may end up with the following, depending on your income situation, how you're earning (business versus W-2, et cetera), and how granular you really wanna get. So top level, you've got that checking account where new money is coming in. You've got the savings account that you might be using for an emergency fund. Then you've got a few separate cash or cash equivalent accounts that are, you know, set aside, earmarked, labeled for things like car, travel, shopping, furniture, wedding, whatever. Then you might also have a big purchase, taxable brokerage account or two, for something like a house or your own wedding or a kid, with a medium-term timeline that allows you to invest conservatively apart from the long-term investing that's gonna be a little bit more aggressive. And then finally, you will likely have a 401(k) or a similar account through work, or self-employment, a Roth IRA, and a long-term taxable brokerage account that is invested more aggressively, like those retirement accounts. When it comes to divvying up your funds every month into these various pots, that'll depend on how much you're earning and the timelines that are associated with the goals. So this is all part of transitioning from flying by the seat of our pants to calm, cool, and in control, because the hardest part for most people is the initial transition from spending everything as it's coming in to being Proactive Paulas, and that's because most of us do a lot of our spending on credit cards that are not due until 45 to 60 days later. So you might decide today to put the brakes on, get your shit together, but then the bill that you get next week is gonna be reflective of your behavior from two months ago. And that's okay. The transition period will feel wonky. It's totally fine. It takes a cycle or two for your new behavior to be integrated and reflected in your credit card statements. But hang in there. Opening the accounts, labeling them appropriately, and then determining how much you want to automatically transfer into each one every month after each pay day, that's step one. And if you need to start small, so you can assure that you've got enough left over to pay those last few big credit card bills, no problem. Just make sure that you're increasing the transfers as you phase out of the current cycles. Proportionally, you could look at exploring a 50/30/20 model here, where 50% of your income could go toward monthly expenses that are recurring and predictable. 30% could go toward these short-term savings goals that are usually more reflective of your wants. And then 20% can go toward long-term savings. And if you can save more for the long term and spend less in the near term, great, but everyone's situation will look different depending on the income shovel. The more money you make, the smaller your percentage of monthly spending will probably be. 

All right, everybody, let's dig into another Rich Girl Roundup. This time, about life insurance. As my standard disclaimer, I am not a licensed financial professional, and this is not financial advice. This is just “What would Katie do?” This segment is brought to you by Betterment, giving you the tools, inspiration, and support you need to become a better investor. Here is this week's question, from Allison. 

Allison: Hi Katie. My name is Allison, and I'm calling in from Cincinnati, Ohio. I wanna hear what your thoughts are on life insurance. I currently pay for a plan and I really like knowing that I'll have a nice chunk of savings in about 10 years that I can pull from for the rest of my life, for any reason, any emergency, completely tax free. However, a lot of people have told me that it's a scam and not worth it. And I wanna know what your thoughts are. 

Katie: Oh, okay. A question that is sure to bring all the insurance salesmen to the yard. I will open with this: Insurance is a very profitable business, and they do not stay profitable by increasing your returns. They stay profitable because they have rigged the deck in their favor with actuarial tables and data that makes them all but certain that they won't lose. Insurance does serve a purpose in your financial strategy. It protects you against serious downside risk, but it's not an investment strategy, right? It's not a proactive wealth growth strategy. So if you have dependents—and by dependents, I mean people who rely on your income, whether that's a spouse or a child or parents—it's probably smart to implement term life insurance into your financial plan. And a registered CFP professional can help you determine how much and whether or not it actually makes sense for you. So I don't wanna say that insurance is completely unnecessary or it's a scam, because that would be unfair. That said, I don't know anything about the details of this policy in question, you know, you mentioned you'll definitely have half a million dollars in 10 years from now, but I don't know how much you're paying into that plan or how accessible that money is, or what types of fees you're paying. 

But I can assume based on the language and the types of plans that typically warrant these types of questions that we're talking about an indexed universal life insurance situation, and those tend to be quite expensive. So IULs work like this: You pay a premium, some of which goes toward the cost of life insurance and some of which pays fees. Then what's left is added to a cash value associated with the policy, and the cash value is supposed to be indexed to the stock market. So if the stock market goes down one year, say, negative 20% like this year so far, the IUL cash value is safe, with a 0% floor. But if the S&P 500 goes up, the cash value increases, but with a cap. For example, last year, the S&P 500 was up 26%. But the IUL’s growth is capped. So if your IUL is capped at 9%, you didn't get 26% in the market. You got 9%. So historically speaking, over the long term, you are probably going to be paying a premium to pretty substantially underperform the market. I personally wouldn't buy an insurance product like this one. And if you need insurance, term life is likely your best bet. But I would say, talk to a CFP professional if you are really concerned and you need guidance, as opposed to a financial advisor whose salary might be paid by the commissions on these types of products. No hate to the insurance people, no shame, get your bag, but for the consumers, know what you're buying. You typically pay pretty high fees with these IUL policies. You got commission fees, annual fees, you name it, which will play into this calculus as well. But out of curiosity, I used a compound interest calculator to figure out how much someone would have to invest to have $500,000 in 10 years. If you assume a 7% real rate of return, on average, in line with historical returns, you'd have to invest about $3,000 a month to hit half a million in 10 years. 

Life insurance is not an investment. It's there to protect your downside risk. And if someone is positioning it as an investment to you, ask them how much money they stand to make if you buy it from them.

All right, y'all, that is all for this week. I will see you next week, same time, same place, on The Money with Katie Show. Our show is a production of Morning Brew, and is produced by Nick Torres and me! Sarah Singer is our VP of multimedia, and additional content editing comes from our lovely senior editor, Henah Velez. Sam Cat is our VP of chaos. And Jojo is our chief of woof, barking at any and all passerby, regardless of how well our recording is going.