Saving for the Short/Medium-term
4 min read.
Guys, don’t worry, saving for the short/medium-term is far easier than investing in the long-term. We’ve already defined that we’re going to keep our savings in a fixed-interest-rate savings account. I’ll leave you to discover the bank and the account that best suits you, in terms of maturity, flexibility to withdraw your savings, and of course, the interest rate that it offers.
So I just want to cover one topic. How much of the savings we’ve accumulated until now should we allocate to this savings account?
To start answering this question, we first need to remember why we’re saving for the short/medium-term in the first place. We’re saving for two reasons:
- To have a safety net from which we can support ourselves in case of a job loss or loss of income.
- To cover foreseeable big-ticket expenses, which to someone in their 20s and 30s could be a car, a vacation, a down-payment for a home, a wedding, a child, etc.
So what we have to do to know how much to allocate to our short/medium-term expenses is to estimate those two items we want to save for. Once again, I’ll leave you to estimate how much of a safety net you want to build for yourself because it depends on your expenses and how risk-averse you are. But I do want to talk about our foreseeable big-ticket expenses because, if you’re like me, you have no clue about how much you have to save to cover them.
Just a quick note first. The reason why we want to be as accurate as possible in our predictions is that we want two things that go against each other. On the one hand, we want to be able to afford these expenses when they arrive. On the other hand, we want to pour into the stock market for our long-term investment as much as we can, to take advantage of its exponential growth potential.
So really take the time to sit down and think about what you might want in the near future. Will you want to buy a car? Will you marry, and if so, how is your wedding going to be?
Foreseeable Big-Ticket Expenses
I’m currently 27 years old. In my own planning for upcoming big-ticket expenses, I included the following:
| Expense | Age at expense | My part of the expense (%) | My part of the expense (€) |
|---|---|---|---|
| Car | 30 | 100% | 15 000 € |
| Home down-payment | 32 | 50% | 20 000 € |
| Wedding | 33 | 50% | 7 500 € |
| First child | 34 | 50% | 7 500 € |
Now, for the ones who know me, this might come as a surprise. Me, having a 15 000€ wedding? Marrying, even? And how about having a first child, how can anyone predict that?
The truth is that I have absolutely no idea how my life is going to turn out. Today, I don’t think that I’ll want to own a house. I’ll only consider buying one if I really cannot find a good landlord who I can trust and who provides me good service. Today, I definitely don’t think that I’ll want an expensive wedding, it doesn’t fit my personality. But the fact is that my wants can change. And recognizing that, I prefer to cover my potential expenses so that, if my wants do change, I’ll be able to afford to do what I want to do.
Just to give you an idea of how much I need to save to cover the above expenses, considering a gross fixed interest rate for my savings account (TANB for Portuguese people) of 1% and considering no accumulated savings, I would have to start saving 1.040€ per month. That’s 1.040€ per month. Absolutely crazy for Portuguese standards. Fortunately, I do have some accumulated savings, but they don’t decrease my monthly savings target that much, to be honest…
You can have the excel I created to make these calculations here: future-spending-forecast.xlsx. Use it to forecast your own upcoming big-ticket expenses.