We may already be familiar with targeted savings. If you work a regular 9 to 5 job, you're probably paying "social security" and "medicare" taxes, automatically deducted from your pay. These are examples of targeted savings buckets (mandated by the government) towards your social security income and health insurance payments during your retirement, respectively.

An example of targeted savings that is optional is the 529 plan that helps us save money towards our children's education. Similarly, saving money through our company's retirement plan or using an independent retirement account (IRA) is, though not strictly targeted, can be considered semi-targeted savings - we're saving towards our 'retirement living expenses' target.

We also know about saving for, say, a vacation trip or a new car purchase. These are examples of personal targeted savings. This is where we have most control — how much and how long to save, how to grow or preserve the savings, when and how much to withdraw, etc.

Steps

Creating a targeted savings bucket is simple:

• Decide on the target. What are we saving for?
• Decide on the amount needed.
• Decide on when we need the amount. A year from now? 20 years from now?
• Research the different savings and investment strategies. Each option comes with its own pluses (capital preservation, growth, tax reduction, etc.) and minuses (risk of losing the capital, minimum account balance requirements, early withdrawal penalty, etc.), so do a little bit of research before deciding on the strategy.
• Based on the above, calculate how much capital is needed.
• Start saving!

Multiple Concurrent Targets

When we're saving towards multiple targets at the same time (e.g., next year's vacation, and child's college 15 years from now), it makes sense to create separate savings buckets for each of these targets. This allows each bucket to be invested differently and grow at a different rate (the long-term bucket could be invested in a mutual fund that helps it grow at a compounded rate, while the money in the short-term "vacation trip" bucket may simply be parked in a savings account at the bank).

There are several options to do this:

• Different savings/checking accounts in the bank. Most banks allow us to create multiple accounts at no charge. But check: some banks may have a minimum account balance requirements to avoid a fee.
• Separate mutual fund accounts at your favorite financial management company.
• Buying good government bonds that mature several years later. These are best suited for low-risk long-term savings buckets.

Advantages of Targeted Savings

Why targeted savings? Why not just save and invest everything in one place and take what we need when we need from it? Targeted savings have a few benefits:

• If kept separate from our general savings, it is easier to keep the targeted funds from being usurped for other purposes, including day to day expenses.
• As we saw above, we could have multiple concurrent targeted savings buckets, each for a different purpose. Each target could have a different timeline and a different investment strategy.
• Each bucket's progress can be tracked independently.
• It is a good way to teach kids about planning for the future. Coming up with savings targets and watching their money grow (say at a savings account) get children excited.

Summary

Targeted saving is a very simple but effective tool to help us stay disciplined and focused about savings. It can also serve as a sandbox in which to play — with small amounts of money! — to try out and learn about different investment and growth strategies.