Why you need long-term and short-term savings

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Kara Robinson
January 26, 2022

How to set up different savings accounts to meet your goals

Key takeaways:

  • Different types of accounts are designed to support different savings goals
  • Both long and short-term savings accounts help to prepare you for the future.

    Short-term savings accounts: 

  • Are typically for emergencies and planned expenses in the next three years
  • Allow funds to be accessed immediately
  • Include Emergency Savings Accounts 

     Long-term savings accounts: 

  • Are for goals that are at least three years away but are often decades away
  • Secure funds that are designed to be accessed in the future 
  • Include retirement savings and college savings 

You know all about the importance of saving. Financial analysts are always cautioning people to make sure they have enough money set aside for their future. But, did you know that a single savings or investment account isn’t really enough? Instead, you should have a few different savings accounts to meet different financial needs. 

Most people, for example, need retirement savings as well as emergency savings. In other words, you need both short- and long-term savings. That would require setting up two different savings accounts. 

This advice might sound over the top, especially if you're living paycheck to paycheck or struggling to make ends meet. But paying attention to your short and long-term financial needs will actually reduce your stress and save you money! If approached correctly, saving can be much easier than you think. Here's what you need to know about the importance of short and long-term savings. 

Short versus long-term savings

As a general rule of thumb, short-term savings are for expenses you're likely to have in the next three years. This can include recreational and predictable expenses like weddings, vacations, or new vehicles. It also includes preparing for unexpected emergencies such as broken-down cars or appliances. 

Long-term savings, in contrast, usually apply to goals that are much further in the future. Generally, long-term savings are for events that are decades in the future such as retirement or your kids going to college. In some cases, long-term goals can be just a few years away – like saving up for the down payment on a home. 

Keep in mind that reality is messy, and not every financial goal fits neatly into one of these two categories. You may have financial goals that are in between the short and long-term. You will need to decide how to save for those goals on a case-by-case basis. 

Types of short and long-term savings accounts

Because short and long-term savings needs are very different, they require different types of accounts. There are also different accounts within each of these categories. 

Most people's long-term goal with savings is to pay for retirement. There are a wide variety of accounts you can use to save for retirement, and they include 401(k)s and Independent Retirement Accounts (IRA)s as well as other less popular options. Employers offer 401(k)s, and you can set up an IRA on your own. Both accounts let you make tax-deductible contributions. 

If you're saving for college tuition, you may want to use a 529 plan. Designed especially for this savings goal, these plans allow you to earn money on your investments tax-free, and withdrawals for qualifying educational expenses are also not taxed. However, your initial contributions are not tax-free.

To save for short-term goals, many people use a traditional savings account. You can easily open a savings account at your bank that ties to your checking account. Alternatively, you may want to set up an Emergency Savings Accounts (ESA) through your employer. Some people also use certificates of deposit for short-term savings goals. 

Differences between short and long-term savings accounts

The accounts you use for short and long-term savings don't just have different names. They also work differently. They have direct relationships with the types of savings goals they support. 

Long-term savings accounts such as retirement savings accounts are designed to hold your money for a long time. They can offer high yields, meaning that you earn a lot on your investment, but they also have some volatility. This means that their value goes up and down frequently, but over time, the value tends to balance out. 

Retirement savings and other long-term accounts are set up so that you make the withdrawals when you retire or need to pay for your kids' college tuition. You can make withdrawals from these accounts earlier, but the process is time-consuming. It also comes with tax implications.

In contrast, the funds in a short-term account or ESA are available to access immediately. You can get them as soon as you need them. They generally don't have as high of a yield as long-term savings accounts, but they are less volatile. Their value doesn't change like the value of a retirement account, either. 

The importance of short and long-term savings

If you don't have retirement savings, you won't be ready for the future after you retire. You may not be able to cover your bills or your housing, which in extreme cases could cause you to slip into poverty. Similarly, you may not be able to meet your other long-term goals without adequate savings. 

If you don't have short-term savings, you may not be able to weather emergencies. You may not have the funds to fix broken appliances, deal with unexpected home repairs, or pay for car issues. If you cannot address these problems, they’ll often cause you to go into debt which becomes increasingly difficult to pay off. 

Additionally, a lack of short-term savings can cost you more in the long run. In particular, if you take out a payday loan or put the expense on a credit card, you will end up paying much more than you would have if you had emergency savings. Payday loans charge exorbitant fees, and these fees often equate to borrowing money at an annual interest rate of 400% or higher. 

Now that you understand the importance of having both short and long-term savings, you may be wondering how to get started. Look for ways that you can save automatically. Your employer may be willing to make automatic contributions to retirement savings or ESAs. 

Also, try to save "invisible money." If you get a raise, earmark it for savings before you get used to having the extra funds in your hand. With a bit of deduction and help, you can prepare for both short and long-term goals. 

Talk with your employer about SecureSave's simple ESA

At SecureSave, we understand the importance of short-term savings, and we are dedicated to helping people meet their goals and needs. We offer a revolutionary ESA that allows employers to help their employees save. With our ESA, you can create an account in seconds and access your funds whenever you need to either through the app or directly on the web. 

Visit www.securesave.com to learn about our free ESA. You can join the waitlist to encourage your employer to offer an ESA. Your money. Your control. Your peace of mind.

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