Regardless of the whims of the economy and the shifts of the financial market, one golden strategy remains universal: you need a savings account to secure your future.
Whether you’re the manager of a global enterprise or a cashier at a supermarket, a savings account is the safety net protecting you from unexpected circumstances such as losing your job, or a family member falling ill.
However, not all savings accounts are the same. Sometimes, you want to save money to afford a family trip to Bali in two years, or to plan your wedding next spring. Other times, you want to save for an expense that’s somewhere in the distant future, such as your newborn child one day going to college, or buying a yacht after retirement.
How can you make the difference between these two timelines and make sure you have money saved up for any unexpected expense that comes your way? This is where short-term and long-term savings come in.
Short term savings
Finance experts define short-term savings as savings that you will withdraw within the following three. You can open a short-term savings account with a specific goal in mind (an anniversary, family vacation, planned surgery, having a baby, buying a car, etc), or just so you can have a safety net in case there’s an unexpected expense or you lose your main source of income.
Because you already have an idea on how you will use the funds in this savings account, it will be easier for you to plan your budget and include a small part of your paycheck in there.
Things to consider when creating a short-term savings account
First of all, short-term savings need to be secure. You know you will need that money in a couple of years, so you shouldn’t apply risky investment strategies. Ideally, short-term investments must be liquid and FDIC-insured, so an online savings account is your best bet.
Although the potential return isn’t too high (the average rate is at around 1%), this is a secure savings option that you can rely on for emergency funds.
Although you can open a savings account at your current bank and link it to your main account, this option isn’t very wise because you’ll be tempted to transfer the money and use it for impulse purchases. To avoid this from happening, open an account with a different bank, or, even better, you can open a high-yield savings account, which has a higher interest and growth rate (you can earn over 2% interest).
The main benefit of short-term savings is that they’re immediately available when you need them. They might not provide the highest returns or diversify your portfolio, but this is what long-term savings are for.
Long-term savings are savings that you can use after a minimum of five years, although it’s not uncommon for investors to save for decades. Since long-term savings aren’t emergency funds, you can consider various investment strategies to diversify your portfolio. The most popular options include:
- The stock market – although predicting stock market prices is tough, you can use free resources to become an informed trader and consolidate your knowledge of the stock market. When you start off, stick with safe, low-risk companies and industries, but as you gain more experience and learn to identify market trends, you can go for higher-risk stocks as well. On average, stocks produced an average real return of 6.8% after factoring in inflation.
- Forex – one of the most flexible and transparent investment options, Forex can be a great way to consolidate your long-term savings account, no matter if you’re a beginner or an expert. Besides, you can easily trade Forex online, so after you check the best forex brokers for US traders, you can create an account right away.
- Real-estate – although real estate doesn’t provide the incredible ROI people dream of, it can be a great way to diversify your portfolio and give you some stability when the Forex or stock market are dipping. To avoid unpleasant surprises, invest in a secure real estate market that you know very well, usually your city of residence. If you want to invest in foreign property, always consult a professional advisor first.
Long-term savings don’t get you rich quick, which is why you shouldn’t count on them when you have an emergency. These funds multiply over time so that by the time you reach retirement, you can rest assured you have a secure financial situation.
How to prioritize your savings
Everyone wants to have a fat savings account by the time they retire, but, at the same time, you need to have some funds you can use earlier.
To reach the perfect balance between short and long-term savings, first, you need to understand your priorities.
Do you have some planned expenses for the following three years, such as a new car or extensive home repairs? If you do, then you need to consolidate your short-term savings account and focus on that for a while.
If you don’t, and your current paycheck can cover emergency expenses, then it’s time you consider long-term investments as well. However, keep in mind that you will have to learn how to manage the risks associated with these and you should never make bold moves without asking for professional advice. Also, long-term savings accounts aren’t profitable if you withdraw the money before term, which is why short-term savings are always essential.
Most people want to achieve both when setting up savings accounts. In the words of Rob Williams from the Schwab Center for Financial Research, the goal is to “find a solution that allows you to live comfortably today while making meaningful progress toward tomorrow.” One month, you may have to focus more on short-term savings, while in others you’ll be able to consider portfolio diversification strategies. It’s alright to alternate between the two, as long as you manage to balance all your financial needs.