(Cue “Law and Order” vibes for this note from the Ellevest narrator: In the financial services system, your money goals are represented by two separate yet equally important actions: Saving into savings accounts for shorter-term goals like expenses, and investing into investment portfolios with the possibility of earning returns for longer-term goals like retirement, building wealth, or buying a home. These are their stories. Cue “DUN-DUN,” fade out.)
Whether we’re talking about short-term savings accounts with nicknames like Christmas Fund or Gotta Pay Those Taxes, or long(er)-term investment accounts called A Place to Call Home or Big Splurge (ahem), naming your financial accounts according to their purpose can give you a solid boost. Here's why:
1. They feel more real
What sounds more motivating: “recurring deposit into a Start My Own Business investment goal” or “recurring deposit into investment Account Number 1234567”? When your savings accounts or investment goals have names, it reminds you why you're putting money away in the first place.
Why? Research shows that when you write your goals down and make a plan, you’re a lot more likely to achieve them. Plus, we make decisions using emotional logic, not logic logic. When your brain sees those aspirational names you gave your money goals, it makes sense that they’d trigger more of your emotions — especially positive ones. Much more motivating.
Speaking of emotional logic: A recent study found that people have a particularly hard time with financial decisions exactly because they found them as “compatible with a cold, analytical mode of thinking” that didn’t feel “like them.” The solution, according to one of the authors of that study: Reframe your decision in lifestyle terms — in other words, give it a name.
One more motivator: Think you’re more or less likely to casually “borrow” some cash from a savings account you’ve named “Mom & Dad’s Surprise 50th”? (Your choice, of course, just saying.)
2. You can treat them differently
Maybe you’d like to save up a little money by next February for a trip somewhere there’s sunshine. But you also want to build up $100,000 in eight years to put a down payment on your dream house. Not to mention building up for your retirement. Each of these goals has a really different timeline and target amount.
With separate savings accounts or investment goals, it’s way easier to control how much you put toward each goal — and how often. You can earmark a little bit a month into that sunshine savings account and set up a recurring deposit of 10% of your take-home pay into your retirement investment goals. Plus, if (when) life throws things temporarily out of whack, you can easily put the sunshine on the back burner (bummer), without dipping into your more important goals.
At Ellevest, we give each of your investment goals its own personalized investment portfolio, based on things like your timeline, your priorities, and your projected earnings. For example, with your A Place to Call Home goal (which is what we call investing toward a down payment on a house), you likely can afford moderate investment risk. Because a market downturn doesn’t mean “no house” — you might just go smaller or wait a bit longer.
Meanwhile, if you don’t plan to retire for 30-40 more years, you can typically afford to take more investment risk in your IRA or 401(k). The markets have historically trended upward, so the long timeline may give you a chance to even out any individual downturns.
3. You'll know where each of them stands
When it comes to your money goals, you have to be able to get the lay of the land. When everything’s in one big savings account or investment portfolio together, it can be tricky to see where each one stands. You have better ways to spend your time.
With separate savings accounts or investment goals that have clear names, you can see exactly how much you have in each of those goals. (And at Ellevest, our dashboard makes it even easier than that: We aim to get you to each investment goal in 70% of market scenarios — or better — and we let you know if you fall off track, or are on track. And if you’re off track, we’ll make recommendations to help you get back on track.)
So: Go set those money goals, name them, and go after them. You got this.
Disclosures
© 2018 Ellevest, Inc. All Rights Reserved.
Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.
