Creating a Household Budget for Short-Term Savings
Short-term savings goals could be as simple as putting aside funds for a special purchase or saving for a much-needed vacation. Once you establish your financial target, it's time to turn your attention to faithfully and systematically depositing your budgeted amount into a savings account or money market fund.
Short-Term Vs. Long-Term
The difference between short-term and long-term savings generally has to do with liquidity, meaning how accessible your money is. "Short-term" savings means that you don't commit to putting your savings in a 10-year certificate of deposit that puts your money on lockdown for a decade. The only way to access funds in these types of savings vehicles is to forfeit part of the interest rate that attracted you to the CD in the first place. Money market accounts provide access that's similar to a checking account without a long-term commitment, and they may offer more attractive interest rates than a regular savings account.
Set Your Savings Target Amount
Create a budget for your short-term savings goal beginning with your target amount, suggests Natasha Wyckof, a Certified Consumer Credit Counselor. This target is how much you need for a purchase or the amount you want in your savings within the specified time for your short-term goal. If you have a purchase or goal in mind, you probably already have an idea of the amount you want to have in, say, one year. For example, if you've longed for a piano but you want to buy it with cash instead of putting it on a credit card, shop for piano prices now. Add a few percentage points to account for inflation between now and the time you intend to buy your piano.
Choose Your Savings Vehicle
Selecting where to put your savings is a critical choice in your short-term savings goals, according to Cathy Murphy, a financial adviser with Community America Credit Union. Murphy says that the question you absolutely must ask before you decide where to save your money is, "How long can I tie up my money?" CDs pay higher interest rates than regular savings accounts; however, you must commit to not touching your money for three months, six months or even a year or more to get the best interest rate. If you take your money out of a CD early, "you lose a portion of the interest that you would have earned had you left your money in the CD for the specified period, even if it's a few days short of the CD period," says Murphy.
Develop Your Strategy
Saving for a short-term goal requires you to develop a strategy. If you choose a CD to earn the best interest rate, you have to buy it according to your bank's designated denominations, such as $500, $1,000, $3,000 and so on. "You must make a lump sum deposit to take advantage of the higher interest rates that CDs offer because you're essentially 'purchasing' a savings vehicle," Murphy says. "One way to do this is to make regular contributions to your savings account and when you have enough money to buy a CD, transfer money in your regular savings account to a CD," she says.
Establish Your Priorities
Assuming you already have money allocated toward your emergency fund, household debt and long-term savings, designate the overage toward your short-term savings goal. Examine your household budget to determine where your budgeted amount for short-term savings is coming from - whether it's a surplus from your household expenses or curbing your expenses. For example, if you eat lunch out five days a week, you could cut back to twice a week and pack your lunch three days a week.
Stay Disciplined in Your Saving
Avoid the temptation of skimming off the top of your short-term savings, especially if you justify it with "I'm only saving for a treat and taking a little bit out of my savings account won't hurt." Refrain from pinching small amounts here and there from your short-term savings - otherwise, your short-term savings goals will become long-term goals based on the time it takes to achieve them.