How to decide between savings, credit cards and loans for short-term financial goals?

When it comes to meeting short-term goals financial objectivesTypically, people have the option of planning for their future by accumulating money or funding it with a credit card or personal loan. The second option will give you instant gratification, while the first option may take some time and thus may provide deferred gratification. In this article, we will understand which option to use to meet short-term financial goals.

What are short-term financial goals?

Depending on the timeline for achieving financial goals, these can be classified into short-term, medium-term, and long-term financial goals. Short-term goals are those that must be achieved immediately or in the short term. The timeline for achieving these goals is usually between three months and three years. Since the timeline for achieving these financial goals is shorter than that of medium- and long-term goals, they need to be addressed as a priority.

Some examples of short-term financial goals include:

1. Build and maintain a Emergency fund
2. Purchasing term life insurance for all breadwinners in the family
3. Buy health insurance for all family members
4. Buying an electronic device such as a mobile phone, laptop, tablet, etc.
5. Buy a durable consumer good
6. Renovating the house
7. Buying a two- or four-wheeled vehicle
8. Enjoying an annual family vacation
9. Create a fund for home purchase, down payment, etc.

From the above list, a person should give the highest priority to the first 3 short-term financial goals and focus on achieving them. It is recommended that people plan and fund these with their own money as part of their overall financial planning. Once they have planned them, the person can then take care of the remaining short-term financial goals.

How to plan short-term financial goals?

For short-term financial goals, an individual should include them in their comprehensive financial plan along with medium- and long-term financial goals. Short-term financial goals should be discussed with their financial planner, who can then draw up a goal plan to achieve them. If it is possible to wait, you should always fund your short-term financial goals with your own money.

The goal plan will include the amount to be accumulated for short-term financial goals, the timeline to achieve it, the amount to be invested regularly, the expected rate of return, etc. As you invest each month towards the financial goal, you can review the progress regularly to ensure that you are on track to achieve it.

Since the timeframe for achieving these financial goals is short, the financial planner will recommend investing in debt instruments with low or no volatility in the expected rate of return. For example, if you contribute monthly to a recurring deposit, the rate of return is fixed. If you invest in a liquid fund or a money market fund, the rate of return may fluctuate to some extent based on market conditions.

Once the required amount has been accumulated, you can use the maturity funds from the recurring deposit or the repayment funds from the debt mutual fund to meet your short-term financial goals.

Meeting short-term financial goals by accumulating money for them may take some time. This will result in delayed gratification. However, you will have the satisfaction of meeting the financial goal with your own money. You will not have to pay any credit card bills or personal loan installments.

Meeting short-term financial goals with credit cards

In the previous section, we saw how you can accumulate money to meet short-term financial goals through goal planning. Once you have the money ready, instead of using it directly to pay for the financial goal, you can use the credit card to get some benefits.

You can use your credit card To pay for the short-term financial goal. For instance, let’s take the example of a family vacation in the country. You can book travel tickets, hotel accommodations, and pay for food and other expenses of your vacation using your credit card. When the monthly credit card bill is generated, you can use the money accumulated for the vacation goal to pay off the outstanding credit card bill.

Using a credit card to pay for your vacation expenses will help you get some benefits such as:

1. A free credit period of up to 50 days
2. Instant discounts on current credit card offers
3. Credit Card Reward Points
4. Achieve milestones and/or spend-based offers on your credit card
5. Achieve annual expenses for credit card renewal fee waiver
6. Reach specific spends to unlock benefits like airport lounge access, etc.

This way, you can combine the use of credit cards and accumulated money with the vacation goals plan to maximize your benefits.

What if you haven’t planned your vacation and financed it directly with your credit card? In that case, you should pay the entire credit card bill from your regular cash flows. You shouldn’t carry over any outstanding amounts to the next monthly billing cycle, as you will incur huge credit card interest charges.

What if you do not have enough cash flows to pay off the outstanding credit card balance? In such a case, you can convert the outstanding balance into monthly installments with a term that suits your finances. Most banks allow you to convert specific expenses or the entire outstanding balance into various monthly installment plans. If you are unable to get a monthly installment plan, you can opt for a personal loan. Use the personal loan amount to pay off the outstanding credit card bill. Pay the monthly installments of the personal loan on time and get the certificate of non-payment of installments after paying the entire payment.

Meet short-term financial goals with personal loans

Many people do not have credit cards. In such a case, if you have not planned your vacation, you can directly apply for a personal loan to finance it. Compare personal loan offers from various financial institutions based on parameters such as interest rate, loan term, loan amount, processing fees and other fees, etc. Choose the financial institution and personal loan offer that suits your needs.

The interest rate charged on personal loans is usually between 10-15% per year. Keep in mind that you will need to continue paying the monthly installments on the personal loan for the next 6-36 months, depending on the term you have chosen, long after the holidays are over.

Use personal funds for short-term goals

We have discussed three ways to meet short-term financial goals. The first ideal option would be to use goal planning to accumulate money and then use it for the short-term goal.

However, if that’s not possible, you can use your credit card to pay for the goal along with the credit card benefits. You must pay the full monthly bill with your regular cash flows. If that’s not possible, roll the outstanding balance into monthly installments or take out a Personal loan To pay off your outstanding debt. If you don’t have a credit card, you can opt for a personal loan. Proper planning allows you to manage your finances and achieve all your short-term financial goals.

Gopal Gidwani is a freelance personal finance content writer with over 15 years of experience. You can contact him at LinkedIn.