Guide to Saving Money: Short and Long-Term

Topics: Reading time: 3 minutes

When we think of saving money, we often think of long-term goals. How can you save up for a house, a car, or even just your emergency fund? While these things are all important, so is saving for the short-term.

What do we mean by saving for the short-term? You know that long-term savings are for big things. But what about the in-between things? Saving money for the short term means having money for those surprises that catch us off guard. Things like broken appliances, car breakdowns, or even just a last-minute outfit for that work event. These are things we can’t really prepare for but that we wish we had money for when they pop up unexpectedly.

For the sake of this guide, let’s define these terms in more specific terms:

  • Short-term savings include saving money you’ll spend within 6 months and 2 years
  • Long-term savings is saving money you won’t use for 2+ years

When it comes to being financially savvy, you need both short-term and long-term savings. You need to include both savings goals in your regular monthly budget. In this guide, we’ll explain how to save money in both the short- and long-term.

Short-Term Savings Account

What exactly would you save in your short-term account? It’s anything you plan (or didn’t plan) for in the next two years. Things like vacations, holiday gifts, tech devices, as well as unplanned expenses like car repairs. Your short-term account, unlike your long-term savings, should be easily accessible.

How much should you save in your short-term account? A good rule of thumb is to include at least three months of expenses. This will serve as an emergency fund in case you have an unexpected expense or you’re out of work for a while. In addition, you’ll want to add estimates for any short-term savings goals like your annual vacation.

You can store your short-term savings in the savings account attached to your transaction account. This makes it easy to access in an emergency, but you’ll also have the temptation of seeing the money frequently in your account. Some online banking portals allow you to hide the savings account from view, this can help if you feel tempted to go shopping with your hard-earned savings.

For some, you need a bit more distance between yourself and this account. In that case, you can use a high-yield savings account that’s separated from your usual funds. In addition to being harder to access, a high-yield account will also give you a larger interest return, usually up to 2% extra. While that might not sound like much, it’s certainly higher than the usual .05-.06% at a traditional bank savings account.

How much should you put into your short-term savings account? This will really depend on your savings goals. For example, you might aggressively save each month until you reach your certain amount (usually 3 months of living expenses). From there, you might save between 2-5% of your monthly income or even 20% if you follow the 50/20/30% budgeting rule.

Long-Term Savings Account

Next, let’s talk about how to handle a long-term savings account. This account is for long-term goals and purchases. Things like saving money for a car, home funds, and even retirement goals should be included in your long-term goals. This is an account that you won’t touch frequently, and you definitely want to be harder to access.

How much do you need in this account? Once again, the three months of living expenses is a great starting point. Beyond that, you’ll want to budget for your own personal goals. You can keep these funds in a high-yield account, or even the same account as your short-term funds. However, to maximize your savings, use an investment account which comes with more flexibility and investment options.

Once again, you’ll want to save anywhere from 2-5% of your monthly income in this account, or more if you’re aggressively saving money towards a goal like early retirement or buying a home.

Saving Money – Prioritize It!

Have you ever heard the phrase “pay yourself first?” This simply means you need to prioritize savings when it comes to your monthly budget. Of course, you’ll need to still take care of your monthly expenses, but you should also treat your savings as an expense you expect every month. This is the best way to ensure your short-term and long-term funds are constantly growing.

In a perfect world, you’ll have money to add to your short-term and long-term accounts every month. This isn’t always going to be possible, but as long as you have an emergency fund, you’re already doing better than most Australians. In fact, 25% of Australians have less than $1000 in cash savings. That means they’ll need to rely on unsuitable methods of credit like payday loans to pay for emergency expenses.

No matter where you start, make sure you have a savings plan you can trust. The money experts at Debt Busters are here to help you establish a short- and long-term savings goal that works for your income and expenses. Talk to our professionals today on 1300 368 322 to start the process, no matter where you are on your financial journey.


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