Four Steps to A Winning Short-Term Savings Strategy

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By Vice President, Associate Financial Advisor Leisl Cording, CFP® 

 

Saving money for emergencies and short-term goals is of course a critical component to financial wellbeing. But when it comes to creating a short-term savings strategy, many people don’t think beyond the traditional savings account – and some may not be saving at all.

Here’s a four-step process to get you on the road to successful short-term saving so that you can plan well to be prepared for the unexpected, and have the funds to afford those larger purchases and experiences that’ll help you to live well in the next several years ahead.

First, understand the difference between short-term and long-term saving.

Short-term saving is intended to provide you with the funds you need in case of a financial emergency, and to fund short-term goals you have set for yourself in the next three to five years, like buying a car or checking that dream vacation off of your bucket list.

This is different than long-term savings such as college savings plans or retirement savings. Long-term and short-term savings require different strategies, so it’s important to understand that you can’t apply a one-size-fits-all approach to both. It’s also important to remember not to prioritize your short-term “saving to spend" over your long-term “saving to invest.”

 


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Next, determine how much you can save.

In order for you to build up short-term savings successfully, you first need to determine how much you can realistically save while also paying your bills, meeting your everyday needs and maintaining your long-term investment strategy. This is where having a solid budget comes into play. A good rule of thumb is to follow the 50/30/20 rule. Take your monthly income after taxes and earmark 50% of it to cover your bills and basic needs; allow 30% for spending on every day non-essentials; and dedicate 20% to savings. Just remember, though, to then further divide up that 20% earmarked for savings between your short-term savings and your long-term investments.

Choose the right savings vehicles.

For short-term savings, you’ll want to stay away from higher-risk investments like stocks, because there’s not enough time to recover your losses if there’s a dip in the market. Instead, opt for a lower-risk option like savings accounts, bonds, or CDs. Keep in mind that even among these products there are differences in risk, though and that, in general, products with higher risk also provide a higher return. You must also consider whether your deposits will be liquid, meaning that you can withdraw your funds at any time without penalties or loss of principal. Some savings vehicles, for example CDs, require that your deposit remain in the account for a certain amount of time.

Depending on your overall savings goals, it may be a good idea to set up a combination of accounts. A low risk, high-liquidity account is ideal for an emergency fund, while a slightly higher-risk, less liquid investment may be the better option to maximize savings for a particular purchase or goal that is several years away.

Here are some good short-term savings options to consider:

  • Savings or money market accounts – These accounts carry the least risk and are highly liquid. They’re best for saving funds that you may want to access within a year or less. Interest rates on savings and money market accounts are low in general right now but some accounts do still offer a greater interest rate than others, so it pays to shop around. A savings account with an online bank will typically offer a slightly higher annual percentage yield (APY) than a traditional bank, since it doesn’t have the same overhead costs. And a high-yield savings account or money market account will likely provide greater returns than a traditional savings account – currently anywhere from about .4% to .6% APY. A little online research can go a long way toward finding an account with the best return – Bankrate.com is a great place to start.
     
  • Short-term corporate or U.S. government bond funds and U.S. Treasury’s – Short-term bonds are issued by corporations to fund their investments, and by the U.S. government to cover its investments. Treasury’s are specific securities you can purchase from the government in the form of T-bonds, T-bills or T-notes. All are low-risk and highly liquid – they can be bought and sold on any day that the stock market is open. They pay out a higher interest rate than savings accounts – about 1%, on average – but you’ll need to leave your money in longer to see those gains. This is a good option for saving money that you don’t intend to access for two to five years.
     
  • Certificate of Deposit (CD) – A CD offers higher interest rates than either savings accounts or money market accounts, but you are required to leave your money in them for a specified amount of time. This can range from weeks to years. The longer you agree to leave your money in the CD, the higher the rate the bank will pay. Currently, a 3-month CD pays 0.4% APY, while a 5-year CD can pay out up to 1.25% APY. If you plan to use a CD, consider aligning the maturity of the CD with when you will need the money.

Remove temptation to stray from your saving strategy by making it automatic.

Automating the saving process is a great way to avoid the temptation to divert your savings into your pocket for spending cash. Set up an automatic transfer to occur on each pay day, so that the funds you’ve earmarked to save go from your checking account to your savings account without you even having to think about it. If you have direct deposit from your employer, you may even be able to set up the direct deposit so that your paycheck is split between your checking and savings accounts.

Work with a financial advisor to create a savings strategy that's designed with both your short- and long-term goals in mind.

At Weiss, Hale and Zahansky Strategic Wealth Advisors, we follow a proprietary Plan Well. Invest Well. Live Well.™ stategy to help create a personalized plan for each of our clients, designed with their specific situation and goals in mind. Get in touch for a free consultation to see how we can help you strategize to reach your goals.

For more tips and resources on how to Plan Well, Invest Well, Live Well™, visit our Advisor’s Blog at whzwealth.com/advisor-blog.

 

Authored by Vice President, Associate Financial Advisor Leisl L. Cording, CFP®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.

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