How to categorize savings
The money you save can’t just be put into a savings account to be forgotten. You have to decide how the money you set aside is to be allocated so you can put it into the places where it will be the most effective for you. So you need to break your savings up the right way to make that happen.
The easiest way to divide savings up is by breaking it up for the time you plan on using it:
- Short-term savings. This is money you have set aside for the near-term. It’s the base amount you have in your primary savings account in case of emergencies, along with money you have set aside for one-off expenses that don’t fit into your regular budget, such as money you’ll use to purchase big-ticket items like electronics or furniture or money you set aside for the winter holidays.
- Mid-term savings. This is money you have set aside for things you want to make happen in the next few years. It’s the savings you have for things like making down payments on loans for your next car or home. It also includes the money you set aside for a financial safety net in case you face a period of unemployment or extended illness. This is the money that keeps you stable and helps reach your goals.
- Long-term savings. This is the money you have saved for big financial events in life, namely sending your children to college and supporting yourself during retirement. These types of savings are usually kept in separate accounts and may be supplemented by money you have tied up in investments. It’s the money you use to promote lasting financial security and success for you and your family.
Maintaining short-term savings
Short-term savings is usually kept in a traditional savings account. This way it can be easily accessed if and when you need it. You always want to maintain a minimum amount of money in the account in case of emergencies, so your balance should never be down to zero. This helps you avoid financial distress and helps you de-stress mentally because you know you have money if you need it.
At a minimum, financial experts recommend that you have $1,000 in emergency savings that you can access at a moment’s notice. This is enough money to cover things like a car or home repair or the out-of-pocket expenses for a medical emergency. If you have an emergency and have to use it, you should focus on putting back the money as soon as possible so you’re ready the next time something happens.
In addition to the $1,000 minimum, you may also be setting money aside in short-term savings for a specific near-term purchase or event. Birthday and holiday gift money, big-ticket item purchases, and even savings for family vacations can fall into the category of short-term savings.
The financial safety net of mid-term savings
Mid-terms savings are meant to help you maintain stability and achieve your goals. This type of savings helps you meet challenges and make things happen.
The first part of mid-term savings is your main financial safety net. While emergency savings gets you through one unexpected event, this safety net is meant to support you over a longer period of time. In general financial experts recommend that you should have 3-6 months of budget expenses at minimum set aside in case of something like unemployment or extended illness affects your ability to earn income.
This means you have money to cover all of your bills plus other necessary expenses like groceries and gas. By having this set aside, you could feasibly support your household for a period of time even if no money is coming in. That way, you’re not stuck relying on credit and accumulating excess credit card debt.
Mid-term savings may also include money for major asset purchases and other things that take a few years to save up for to reach the goal. This includes money you save up to purchase a car or make a down payment on a house. It’s essentially anything you plan for and save up to make happen in the next few years. The money is usually kept in a savings account, Money Market Account (MMA), or even investments that can be cashed out in a few years.
Saving up for long-term success
Long-term savings is what you set aside to make sure your family is in the best financial position possible no matter what comes.
This money is usually kept in special accounts intended for the long-term purpose you have. So if you’re saving up for your children’s education, you have money put into something like a 529 college savings plan for each child you have. For your retirement the money gets put into a 401(k) through your employer or an Individual Retirement Account (IRA).
This can also include investments you have to supplement your accounts. You may have things like stocks, bonds, and CDs that earn a higher rate of interest so you can boost your money for these goals even more. In general, the longer you leave money to grow, the more return you get. It’s also important to note that if you get into trouble and have to access this money, you may be able to make withdrawals on long-term investment and accounts, but it will come at a cost with penalties and added taxes.
