Three Critical Types of Savings

One of the keys to financial success is planning – especially planning for the unexpected. Another key is patience. The way you interact with money and plan for the future impacts your long-term financial health. Your savings plan can keep you on track, prevent you from going into debt, and protect you from financial setbacks. As you create a savings plan, there are three major types of savings to focus on:

Short-Term Savings

Instead of making large purchases using a credit card, or some other type of financing, use short-term savings as a way to acquire the funds you need. Instead of using a credit card to buy a big-screen TV, or a new computer, save up to make these purchases ahead of time.

Saving your money for major purchases encourages discipline in your finances. On top of that, you avoid paying interest and racking up debt. Instead of giving in to instant gratification, buy when you have the money. Easy credit in the past led to the practice of buying things before being truly able to afford them. Short-term savings can help you live within your means as you plan to make consumer purchases and save up for vacations.

Short-term savings goals can also be applied to other purchases. Use your short-term savings to build up enough cash for a down payment on a car or a home. The point of short-term savings is to help you reach a specific goal within a few months or within a couple of years.

Figure out how much money you need to save up, and determine a timeframe. Then, set aside money each month until you reach your goal. A high-yield account is a great place to keep your cash for short-term goals, since you will earn an interest yield (albeit a small one) on top of saving up for your goal. Plus, the money will be accessible when you are ready for it.

For slightly longer goals, some like to invest in special bond funds, or use some other “less risky” investment. This strategy requires advanced planning, since your funds may not be accessible. You will need to plan ahead so that your money becomes liquid when you need it. You also need to be aware of the risk of loss.

Long-Term Savings

For goals that are years and decades in the making, a long-term savings strategy is essential. Long-term savings goals include retirement and college for your children. Long-term savings are meant to help you provide for the future. Your retirement savings allow you to live in comfort, if you have a large enough nest egg. When you save up for college, you and your children have less of a chance of becoming overwhelmed by student loan debt.

This is about planning for the future. However, the situations that long-term savings are meant to provide for are often expensive.

Using only a savings account might not be enough to ensure that you have enough money for the big long-term goals, since the yield is low. For long-term savings goals, investing can be a way to increase your returns.

Special investment accounts for retirement and college savings can help you reach your goals. However, consistency is key. In order to get the maximum benefit, you need to start saving early, and regularly contribute to your accounts. Even if you can only start with a small amount, the important thing is to start. You can increase the amount you contribute later. There are numerous calculators online that can help you estimate how much money to set aside each month in order to reach your long-term goals.

Emergency Savings

When you run into an unexpected and costly problem, the strain on your budget can be devastating. Emergency savings can help you pay for unpleasant surprises without needing to rely as heavily upon credit. Emergency savings can be used to pay for car repairs, replace appliances that break, or cover the co-pays associated with major medical procedures. A large enough emergency fund can also help sustain your family finances if you suffer from unemployment or under-employment.

Like creating short-term savings and preparing for long-term goals, building your emergency fund requires time and effort. Most people can’t fund their emergency savings quickly. Look for ways to cut back on unnecessary expenses, or earn more money, so that you can save up for a rainy day. If you are persistent, eventually your emergency fund will grow large enough to allow you peace of mind and financial protection.

Emergency savings should be accessible and liquid. A high-yield savings account is often preferred for an emergency fund. The interest earned is not impressive, but, as long as the money is in a properly insured account, it is safe. Additionally, you have instant access to it when the emergency strikes. If you keep your emergency fund in an online bank account, consider linking it to a checking account from the same financial institution. That way, you can transfer the funds instantly to the checking account and access the money via debit card.

Bottom Line

A savings plan should encompass short-term and long-term goals, as well as include a provision for an emergency fund. When you plan ahead, and make the effort to save for the future, financial stability usually follows – and you will be protected from financial setbacks.