Wealth Manager: Why You Should Start Saving For Your Dreams Now
Dreaming isn’t just for kids. We all only have one life and should think big.
Like most things in life, you have to put in effort to see results — and the same goes for achieving your dreams and goals.
That’s why money expert and best-selling author David Bach wants you to fund what he calls a “dream account.”
“If you don’t actively save for your dreams, you may never make them reality,” he says.
Think about your big dream — it could be buying a home, going on a vacation, redecorating your kitchen or quitting your job to start a business — and then start saving for it.
“The way you get closer to your dreams is you fund them,” says Bach, who is currently living out his dream of moving to Italy with his family — and you want to fund them automatically. That means setting up a recurring transfer (either monthly or whenever your paycheck lands) from your checking account to your “dream account” so that you’ll never skimp on these savings.
The size of your regular contribution depends on the cost of your dream and how much you can comfortably set aside, but aim to put 5% of your after-tax income into this account, says Bach. If your dream is ambitious and pricey, or if you have a short timeline, you might want to save more than 5% of your income. Ultimately, how much you decide to set aside is up to you.
Where to keep your dream money
To help ensure you don’t dip into your dream fund for other expenses, put this money in “an investment account separate from your checking account and retirement account,” says Bach.
How you invest this money depends on your time horizon.
If you’re saving for a short-term dream — maybe you want to go to Hawaii at the end of the year or take piano lessons — put this money in a high-yield savings account, where it’ll be safe and highly accessible, but will also earn a little more interest than if it were sitting in a traditional savings account.
“The decent [high-yield accounts] right now are paying about 0.5%, so you’re not going to get rich off investing in a 0.5% account but you’re going to know for sure you have the money there,” explains Bach.
For dreams that are 2 or 3 years out, “I’d recommend a bond fund,” says Bach, which is generally less risky than a stock mutual fund. Major brokerage firms like Vanguard, Fidelity and Charles Schwab all offer bond funds.
Finally, when you are saving for long-term dreams that will take you more than three years to reach, “now you can start looking at a balanced approach,” he says. “This is probably the best way to go for a dream account.”
Balanced funds are mutual funds that invest in both stocks and bonds. Generally, about 60-70% of a balanced fund’s assets will be invested in stocks, with the rest invested in bonds (usually Treasuries). As a well-diversified fund, it’s less risky than a pure stock fund. You shouldn’t expect a balanced fund to outperform the stock market — but it should come close to matching it.
The bottom line: Investing in a balanced fund will give you slow and steady progress to where you want to go, without incurring a ton of risk.
Another option is to invest your dream money using a robo-advisor, like Betterment and Wealthfront. Robo-advisors use technology to build and manage an investment portfolio that’s right for you, depending on your goals and risk tolerance.
The way it works is, you go online and answer a series of questions about things like your time horizon, financial goals and risk tolerance. Using an algorithm, the robo-advisor will build a diversified portfolio fit for your situation.
Check out Finishrich.com’s top recommendations for robo-advisor companies.
Once you select an account to use, start funding your dream account right away so that your dream becomes that much closer to reality.
“Nothing gives energy to a person’s life like a dream account,” says Bach. “It makes your future exciting.”
And the best part is, “it’s not complicated,” he adds. “You just have to do it.”
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