For most of us, when we fancy making a big purchase, going on holiday, or buying a new car, we’re going to need to do some saving first.
But where should you be keeping your money? Short term goals have different characteristics to long-term goals like retirement, meaning they often need to be approached differently.
What are short-term saving goals?
Generally, your savings goals would be considered short-term if you’re planning to use the money within the next five years.
Examples of short-term savings goals include paying for a holiday, treating yourself to a new TV or smartphone and even saving up enough money to put down a deposit on a property.
It can also be a good idea to think of your emergency savings as a short-term goal, as you don’t know when you’ll need that money.
Now, you could save for these things using your piggy bank, but in reality you’ll probably be better off putting your money in an account with a bank or building society.
What makes a good short-term savings account?
The key thing to look for in a short-term savings account is how easy your money will be to access. For this reason, you’ll want to make sure your money is kept some place where:
withdrawing some or even all of it doesn’t require a lot of advance notice (or, at least, it can actually be withdrawn when you do need it).
it’s held in cash or can be converted into cash fairly quickly without significantly affecting its value.
In general, the easier it is to withdraw your money, the less interest you’ll be able to make on it. The best interest rates are typically available if you tie your money up for five years or more, which isn’t ideal when you’re saving for the short-term.
Short-term savings: what are your options?
There are several types of savings account you can choose from, each with slightly different characteristics.
1. Easy-access savings account
Most banks offer some form of instant access savings account. These let you dip into your savings whenever you need to, without having to give any notice to the bank. This makes them well suited to housing your emergency fund.
Typically, these kinds of accounts let you start off with a small initial deposit. They also tend to let you pay in money as and when you like. But they often have very low interest rates so what you put in is, more or less, what you’ll get back out.
2. Notice savings accounts
Notice accounts tend to offer slightly higher interest rates than easy-access accounts, because you’re tying your money up a little bit more.
When you want to make a withdrawal, you’ll have to give warning to your bank, or you risk losing some interest. Usually this is 30, 60 or 90 days, but it depends on your bank.
This means they aren’t that suitable for emergencies, but if you have an idea when you’ll need your money, they may be worth considering.
3. Regular savings account
Regular savings accounts require you to commit to paying in a set amount of money each month for a specific period of time. Because of the way they’re set up, they can work especially well if you have a definite date by which you want to reach your savings goal. However, this kind of account may not be right for you if you can’t commit to saving a fixed amount every month.
4. High interest current accounts
At the moment, some current accounts offer considerably higher interest rates than savings accounts. They are also safe and easy to access, so they’re well worth considering as an alternative place to put your short-term savings. With that being said, do keep in mind that many high interest current accounts will require you to pay in a minimum amount and to pay out at least two direct debits each month. And interest is usually only paid on a set amount (typically between £1,000 to £4,000).
5. Flexible cash ISAs
Easy-access cash ISAs allow you to put away as much - or as little – money as you want each month. They also let you withdraw your money whenever you need it.
A benefit of cash ISAs is that any interest you earn is tax free, and any money in a cash ISA stays tax-free for as long as it’s in there. So if you save in an ISA every year, over five years you could end up sitting on a reasonable tax-free sum. However, your money may lose its tax-free status if you make a withdrawal. For this reason, a cash ISA usually works best if you’re planning to use the entirety of your savings all in one go.
6. Fixed-rate cash ISAs
If you don’t need instant access to your money (for example if you know the exact dates by which you’ll need it) fixed-rate cash ISAs might be worth considering.
It’s possible to invest your money for as little as six months. However, you’ll need to put away a lump sum, usually at least £1,000. And you won’t be able to access it for the length of the investment.
What about investing?
If you’re wanting to make money quickly, you might be tempted to put your cash in a risky investment – i.e. an investment with high interest rates.
Typically, making an investment like this when you’re saving for the short term is unlikely to be worth the risk. Since investments can go up or down in value fairly dramatically, you may end up needing your money before it’s had time to recover, should it take a dip. In a long-term savings strategy (say over 10 years), you’d have more time for your investments to recover.
The other thing to consider is that high interest rates may not make a world of difference in the short-term. This is because with short-term savings, the pot of money you start with is relatively small and is unlikely to grow that much within 5 years. However, with a long-term investment, your pot continues to grow as you add more money in over time. You’ll also earn interest on both the amount you originally saved, and the interest you’ve built up. This means the high interest rates are more likely to start to earn you some serious money. Comparatively, with short-term savings, there’s only so much interest you can accumulate in under five years.