How to Build a Dream Fund that will Change Your Life

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Today is Dream Fund Day at Savings and Sangria!

What’s a dream fund? A dream fund is the money you set aside specifically to make your dreams happen.

My dream fund is how I:

Furnished my apartment
Got my Master’s Degree without student loans
Bought a house
Traveled the world
Bought an investment property
Started my own content creation business
Moved abroad
Completed a Triathlon

Your dream list may look very different than mine. Maybe you want an epic wedding, or to pay for your kids’ college, or to start a non-profit. The fact is if you want to achieve your dreams, you’re going to need the money to fund them.

Consider this detailed Q&A your quick-start guide to funding your dreams

Is my dream fund separate from my retirement fund and emergency fund?

Ok, we need to start with a broad lesson in personal finance.

Your emergency fund, retirement fund, and dream fund are the 3 critical funds you need to have for financial success. And yes, they all need to be separate.

And actually, your emergency fund and your retirement fund are top priority. You probably don’t want to hear that. But it’s critical to your success. Let me explain why.

Your Emergency Fund

You know in Up when Carl and Ellie are saving for their dream adventure to Paradise Falls? But every time they have a little money saved, something happens: they need new tires, Carl breaks his leg, the roof needs to be repaired after a storm…

This is real life, people. If you don’t have a separate emergency fund to handle emergencies as they come up, your dream fund will be used for emergencies instead of your dreams.

Your Retirement Fund

Then there’s retirement. I know it sounds crazy to start funding your retirement (which is so far away) before funding your dreams (YOLO!). But the secret to saving enough for retirement is to start when you’re young so you have time for compound interest to work its magic. In fact, you can add $831,751 to your retirement account simply by starting your contributions early.

How much should I save in my dream fund?

Short answer: as much as you’ll need to make your dreams come true!

You can do a little research to figure out how much it will cost to make your dream a reality. And that’s your savings goal. Once you hit your goal, you get to live your dream! Then you simply start saving for your next dream.

You can also save for a few different dreams at the same time. This is especially helpful for long-term dreams like buying a house or paying for kid’s college. Maybe you set aside a small amount from every paycheck for that long-term dream, plus another small amount from every paycheck to fund your girls Vegas weekend.

What if I don’t have any money to save?

This question comes up constantly. You want to save, but you’re already stretched thin. How are you supposed to save when you don’t have any money left after paying your bills and living expenses (plus retirement and your emergency fund)?

You really have only have two options:

spend less and/or
make more

That might sound harsh, but it’s actually kinda nice because it’s so straightforward. There’s no crazy scheme to get around this. You simply need to spend less and/or make more.

If you haven’t already done this, make a list of your expenses (btw: this process is also covered in our 5-Day Financial Fix Challenge). You’ll usually find that you can reduce, or even completely eliminate a couple things. Here’s a list of smart ways to cut expenses to help you get started.

And if you’ve cut spending as much as you can (or as much as you’re willing to), you just need to make more money.

Lucky for you, you live in the age of freelancing and making money online. There are tons of ways to add more cash to your life.

Check out some of our recent money-making posts:

Where should I keep my dream fund money?

It really depends on your dreams and how long you think it will take to achieve them.

You want to put your money somewhere it can grow (by earning a good rate of return), but also where it will be available as soon as you’re ready to use it.

Example:

If you think you can save enough for a Dream Getaway 6 months from now, you want to make sure your money is accessible 6 months from now. So you wouldn’t want to tie up your dream fund money in long-term investments.

But if you’re saving to buy a house 10 years from now, you can afford to tie up your money for a while. And generally speaking, tying up your money means you’ll earn better returns. So your money will grow faster!

So what are my options?

There are a million places to invest your dream fund savings. So we’re going to give you reliable options for your short-term (under 3 years away), medium-term (3-7 years away), and long-term (over 7 years away) dreams.

Short-Term Dreams: Money Market Accounts

Money market accounts (not to be confused with money market funds, which are totally different) are kinda like slightly more sophisticated savings accounts. They work pretty much the same way, but they typically offer better rates of return.

They usually require that you keep a minimum balance in the account at all times. So be careful to close the account if you’re going to withdraw so much that the amount left in your account doesn’t meet the minimum.

Generally, the higher the required minimum balance, the better the rate of return.

Medium-Term Dreams: CD’s

If it’s going to take you a while to realize your dream, you might want to consider buying CDs.

Here’s how they work: you buy a CD for a set amount of money and agree that you won’t cash it in for a certain amount of time. For example, you can buy a $500 5-year CD, earning 2.3% interest. At the end of the 5 years, you get your $500 back plus all that interest.

Generally, the more money you invest and the longer the holding period, the better the interest. If your dream is more than 3 years away, CD’s can be a better option than money market accounts because they’ll probably offer better interest rates.

And the fact that you can’t use your money until the maturity date (without paying a penalty) is a good thing because it forces you to save that money for your dream.

Long-Term Dreams: Stock-Based Index Funds

If your dream is a long ways away, you have the luxury of riding the ups and downs of the stock market. And this usually yields the highest returns.

Index funds are like sampler baskets of a bunch of stocks. You buy 1 share of an index fund, and it will include partial shares of dozens (or even hundreds!) of different companies’ stocks. Which is awesome because it spreads out your risk. If one of those companies goes bust, you have the rest to keep your investment from tanking.

Wouldn’t it be easier to just keep my dream fund savings in my emergency fund account with my emergency fund money?

New savers often make the mistake of keeping dream fund money in the same savings account as their emergency money. And this is an expensive mistake.

Right now high-yield savings accounts are earning around 1.55%. And that’s fine for your emergency fund because you need to be sure that money is available whenever you need it.

But it’s a terrible rate compared to other investments. For example, over the last year, the stock market’s S&P 500 Index has earned 14.51%.

How much do those rates really matter?

Rates matter HUGE!

Let’s say you start with $100. And commit to saving $100 every month for the next 10 years. In a savings account earning 1.55%, you’d end up with $13,088 ($12,000 you saved + $988 in interest).

And if you invested that money in the market instead? Let’s assume an average annual return of 10% (because this past year’s 14.51% is really high!). At the end of 10 years, you’d have $20,755 ($12,000 you saved + $8,655 in interest). You’re saving the same $12,000 over 10 years, but you’re earning $7,667 more by investing in Index Funds.

That’s why you don’t want to keep all your savings in your emergency savings account.

So to reiterate:

Emergency savings → keep safe and liquid in a savings account

Dream savings → invest in other accounts so you get the benefit of better returns.

How do I open my dream fund account?

You can open accounts online for whichever account type (money market accounts, CD’s, or index funds) best suits your dreams.

NerdWallet is our go-to for finding the best online banks to open new accounts. Here are their comparisons for:

They’ll even link you directly to the banks so you can open an account online in just minutes.

What do I need to provide to open my account?

You will be asked to provide a few things to open your account:

Your contact info (address, phone, email)
ID (driver’s license, passport, and/or social security number)
Your checking account information so you can transfer money from your checking to your new emergency savings account
Some banks ask for employment info or other demographic information for their records

How do I build my dream fund?

Ok, so you understand why you’re keeping your dream fund separate from your other accounts. And you know how to open an account online in minutes. Now let’s talk about how to actually build your dream savings.

I’m going to let you in on my secret to guaranteed financial success…

Ready for it?…

Automatic transfers.

Ok, so it’s not a super sexy answer. But that’s probably why so many people overlook it and struggle their whole lives to build their savings. Seriously, the only reason I have a fully-funded emergency savings account, an on-track retirement account, and a growing dream fund is because of automatic transfers.

How do automatic transfers work?

When you open your dream fund account, you can create an automatic transfer to move a certain amount of money from your checking account to your dream fund account every payday. Like maybe you decide to set up an auto-transfer of $50 every 3rd and 17th of each month (if you’re paid on the 1st and 15th, that will give your bank a couple days to receive your paycheck, but won’t give you enough time to spend it all!).

This automatic transfer forces you to save. You don’t have to remember to transfer money to savings. And you can’t screw yourself over by spending the money before you have a chance to save it, because it will already have been whisked away out of your checking account and into your dream fund account.

It’s like magic.

But it only works if you set it up. So do it today. Like right now while it’s on your mind and you’re motivated to change your life!

Did we answer all your dream fund questions?

If you have a question that wasn’t answered, or if you have additional dream fund savings tips, leave us a comment!

How to Build a Dream Fund that will Change Your Life