Short Term Savings: How to Plan for Vacations, Cars, and Other New Toys

August 2nd, 2007 • Related • Filed Under • by admin

A lot of people just have one savings account which is supposed to cover just about everything, including emergencies, future purchases, and the like. This works well for some, but when you have a number of different financial goals, things can get un-necessarily intertwined and jumbled together. I currently have three savings accounts outside of my retirement planning. I have one for emergencies, one to pay my quarterly estimates with, and then a third that I refer to as my short term savings fund. It’s a great way to save for larger purchases so that one doesn’t have to borrow money when it’s time for a new car, major appliance or a vacation.

So what’s a short term savings fund? The idea is that one can save a certain amount of money each month, and then when someone needs to make a large-ticket purchase such as a newer vehicle, a vacation, or a home improvement, the money’s actually there to do it! They work very well if you create an automatic savings plan and set aside a certain dollar amount each month for such purchases.

Creating a short term savings fund ensures that when you need to make big ticket purchases in your life, that there will be money there to buy them rather than forcing you to get further into debt. You will be not only be gaining on the interest from the money that’s in the savings account, you’ll also avoid losing money by paying interest on debt that you would have otherwise accrued with some sort of payment plan. Over time this can add up to be a significant amount of money.

There are a lot of good places to open a short-term savings fund, such as a bank that offers a high-yield savings account. There are plenty of great banks to open them with, such as ING Direct, Emigrant Direct, or HSBC Direct. Depending on which bank you go with, you can earn anywhere from 4.5% to 5.3% on the money that you put in the account. These accounts are also totally liquid, unlike some other short-term savings options such as certificates of deposit and municipal bonds.

How much should one put in the account a month? It really depends on what kind of expenses you have. I don’t buy a lot of big ticket items, so I put about $500 a month into my short-term savings account at a minimum. This pays for new computers when I want them, tuition bills, and my most recent car. Don’t offer the excuse that you don’t have that type of money laying around, there’s room in your budget whether you want to admit it or not. You’re going to have to pay for these purchases anyway, so why not make them in a manner that earns you interest rather than getting stuck in a cycle of payments?

Let’s take a look at an example. I want to go on a vacation next march during spring break. I estimate that it’s going to cost around $1000 for that trip (I take frugal vacations). That’s 8 months from now, so if I want to go on that vacation, I’m going to have to save $125 a month for it now, or about $28 a week. Putting a small amount of money each week makes the purchase makes it much easier to swallow, and when the vacation’s over, I don’t have to worry about making payments to finance a trip I already went on. I also earned interest while saving rather than losing money in paying interest on a credit card. It’s that easy!