FINANCIAL ADVICE | managing your money
Saving for the Short and Long Term
- It's a good idea to make a list of your short-term and long-term goals.
- Saving is the act of preserving capital for later use.
- Fixed securities generate a fixed return in the form of interest.
One of the most common reasons you save money is to achieve goals — some you'd like to accomplish in the short term, like in the next year or two, or maybe even five. Some you'd like to accomplish in the long term, in the next ten years or even longer.
In the short term, you may want to purchase a car, and you'd like to have a bigger down payment. Perhaps you've got to make a tax payment in the next quarter. Maybe you'd like to take a family vacation next summer.
In the long term, perhaps you'd like to be prepared for major expenses such as a college education for a family member. Maybe you've picked a target date to retire. Maybe you would like the peace of mind that a nest egg provides to handle life's unexpected and unforeseen expenses.
Set your goals
It's a good idea to make a list of your short-term and long-term goals. To set goals, you work backward over your expected lifetime. Think about what you want to achieve at different points in your life, and then go backward to what you want to achieve now. A helpful question you can ask is, "Where do I want to be ten years from now?"
Take a look at your list. Are all of your goals realistic? Are there goals that are more important to you than others? Prioritizing your goals is an important step to determine which ones you will be able to afford to accomplish. You don't necessarily need to discard unrealistic or less important goals, but you may want to put them in another column.
Your goals list will need to be flexible. Some circumstances that arise in your situation that will allow you to add items to your list, or circumstances that force you to set aside some of your goals. Focus on your most important goals — start on them first.
Accomplish your goals with savings
Saving is the act of preserving capital for later use. Funds will accumulate over considerable time if you're committed to putting away money regularly. When you add a growth component to your savings, you can offset the effects of inflation. The amount of growth you achieve, or interest, is based on your tolerance for risk. Your approach to saving for the long term will look different from your approach to saving for the short term.
This is an important goal for most people. You may be making contributions to an IRA or 401(k) plan. There are tax implications to these retirement plans, and they are set up for the long term. Your financial advisor may recommend a diverse portfolio. A longer investment term allows a riskier the investment strategy to be employed to achieve growth, and you are allowing time for your account to bounce back should it experience a downward trend.
In contrast, it's advisable to use more conservative savings vehicles for the short term. You don't have the time to grow your savings, and you will want to be able to access your money sooner, known as liquidity. These low-risk savings typically will feature a steady rate of interest.
Savings and money market accounts
Your credit union offers standard savings account products that will typically yield an interest rate between 2 to 5 percent depending on current market conditions. Another option is a money market account, which will offer higher yields.
Certificate of deposit
A CD is issued by a bank or credit union and has a pre-determined maturity date that could range from a month to 5 years. The financial institution pays interest to the account holder; however, the rates are typically lower than investment accounts, but higher than a standard savings account.
Equity index and equity exchange-traded funds, or stocks, are typically used for long-term investing because it takes time to ride the daily ups and downs the value of a stock will encounter. A diversified portfolio will offset risks.
College savings plan
A type of college savings accounts is called a 529 savings plan. This type of plan allows you to make contributions to a college education fund that is exempt from federal income tax.
Fixed income securities
Fixed securities generate a fixed return in the form of interest. These are loans you are making to a borrower for a specific amount of time. The borrower promises to pay interest, and at the maturity date, the principle of the loan is paid back to you.
There are several types of fixed income securities, and each has a different value, risk level, maturity date, and interest rate. Do your research to find the fixed income security that's right for your situation — either for the short or long term.
The most common type of fixed income security is a bond. Bonds are typically issued by a corporation or a government to raise money for their operation or a project. Interest is paid to you on an annual or semi-annual basis. Investment-grade bonds are offered by stable companies or governments — there's a low risk of default, but they offer lower interest rates. Riskier still are non-investment grade bonds, also known as junk bonds, feature higher interest rates.
Also known as a muni bond, this type of government bond is issued by cities, counties, and states to fund capital projects. The interest you earn from these bonds is exempt from federal taxes and may be exempt from state taxation. The typical value of a municipal bond is $5,000, and they are traded by OTC market groups.
T-bonds have a maturity date of more than 20 years. Interest and principal repayment are backed by the full faith and credit of the U.S. government. A typical value of a T-bill is $10,000, and they are sold on auction.
Treasury bills and notes
T-bills and T-notes are similar to T-bonds as the U.S. government sells them. The T-bill is a short-term fixed income security that matures within a year and is sold "at a discount below par," meaning they are sold for less than their face value. At the time of maturity, the T-bill is worth the face value. The T-note has a maturity date of 10 years or less and is sold at a discount, at a premium, or at par.
Issued by companies, these fixed-income investments offer a fixed dividend, expressed as a specific dollar amount or a percentage for a specified amount of time. The yield on preferred stocks can be larger than bonds because the stock is issued for a longer duration.
Keep Your Savings At CUTX
When diversifying your savings plan, it's important to choose a trustworthy financial institution to house your savings. Credit Union of Texas has been serving the Dallas, TX community since 1931. We offer Savings, Money Market Accounts, and CDs to help you save for both the short and long term. Open yours online today!