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

When it comes to fulfilling short-term financial goals, people usually have the option to either plan for it by accumulating money or fund it with a credit card/ personal loan. The second option will give you instant gratification, and the first option may take some time and hence may give delayed gratification. In this article, we will understand which option to use to fulfil short-term financial goals.

What are short-term financial goals?

Based on the timeline to achieve financial goals, they can be classified into short, medium, and long-term financial goals. Short-term goals are those that need to be achieved either immediately or in the near term. The timeline to achieve these goals usually ranges between three months to three years. As the timeline to achieve these financial goals is less than medium and long-term goals, they need to be taken up on a priority basis.

Some examples of short-term financial goals include the following:

1. Building and maintaining an emergency fund
2. Buying term life insurance for all family bread earners
3. Buying health insurance for all family members
4. Buying an electronic gadget like a mobile, laptop, tablet, etc.
5. Buying a consumer-durable
6. Renovating the house
7. Buying a two-wheeler or a four-wheeler
8. Enjoying an annual vacation with family
9. Building a fund for house purchase, down payment, etc.

From the above list, an individual should give higher priority to the first 3 short-term financial goals and focus on achieving them. It is recommended that individuals should plan and fund them from their own money as part of their comprehensive financial planning. Once these are planned, the individual may take up the remaining short-term financial goals.

How to plan for 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. You should discuss the short-term financial goals with your financial planner who can then make a goal plan for achieving 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 the short-term financial goal(s), the timeline to achieve it, the amount to be invested regularly, the expected rate of return, etc. As you invest every month towards the financial goal, you can review the progress regularly to ensure you are on track to achieve it.

As the timeline to achieve these financial goals is short, the financial planner will recommend investment in debt instruments with low to 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 proceeds from the recurring deposit or redemption proceeds from the debt mutual fund to fulfil your short-term financial goal(s).

Fulfilling short-term financial goals by accumulating money for them may take some time. It will result in delayed gratification. However, you will have the satisfaction of fulfilling the financial goal with your own money. There will be no outstanding credit card bill to be paid or personal loan EMIs to be paid.

Fulfilling short-term financial goals with credit cards

In the earlier section, we saw how you can accumulate money for fulfilling short-term financial goals through goal planning. Once you have the money ready, rather than using it directly to pay for the financial goal, you can use the credit card route to gain some benefits.

You can use your credit card to pay for the short-term financial goal. For example, let us take the example of a domestic family vacation. You can book travel tickets, hotel accommodation and pay for food and other expenses for your vacation with your credit card. When the credit card monthly bill is generated, you can use the money accumulated for the vacation goal to pay the outstanding credit card bill.

Using the credit card to pay for the vacation expenses will help you get some benefits like:

1. A free credit period of up to 50 days
2. Instant discounts from credit card offers going on at that time
3. Credit card reward points
4. Achieving milestones and/or spend-based offers on the credit card
5. Achieving the annual spends for waiver of credit card renewal fee
6. Achieving specified spends to unlock benefits like access to airport lounges, etc.

Thus, you can combine the usage of credit cards and money accumulated with the vacation goal plan to maximise your benefits.

What if you have not done goal planning for your vacation and have funded the vacation directly with your credit card? In such a scenario, you should pay the entire credit card bill from your regular cash flows. You should not carry forward any outstanding amount to the next monthly billing cycle, as you will incur huge credit card interest charges.

What if you don’t have sufficient cash flows to pay the entire outstanding credit card balance? In such a scenario, you can convert the outstanding into EMIs with a tenure that suits your finances. Most banks allow you to convert specified spends or the entire outstanding into various EMI plans. If you are unable to get an EMI plan, you can go for a personal loan. Use the personal loan amount to repay the credit card outstanding bill. Pay the personal loan EMIs on time and collect the no-dues certificate after the entire repayment.

Fulfilling short-term financial goals with personal loans

Many individuals don’t have credit cards. In such a scenario, if you have not done goal planning for your vacation, you can directly go for a personal loan to fund it. Compare the personal loan offers from various financial institutions on parameters like interest rate, loan tenure, 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 in the 10 to 15% p.a. range. Please note that you will have to continue paying the personal loan EMIs for the next 6 to 36 months, depending on your chosen tenure, long after the vacation is over.

Use personal funds for short-term goals

We have discussed three ways of fulfilling short-term financial goals. Using goal planning to accumulate money and then using it for the short-term goal should ideally be the first choice.

However, if that is not possible, you may use your credit card to pay for the goal along with availing of credit card benefits. You should pay the entire monthly bill from your regular cash flows. If that is not possible, convert the outstanding into EMIs or take a personal loan to repay the outstanding. If you don’t have a credit card, you may go 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 15+ years of experience. He can be reached at LinkedIn.