Always allocate a part of your savings to the long term
A new cell phone, changing the computer, renovating the house, changing the car, going on vacation, a wedding in the family, the children’s college and even retirement…. We all have different goals in life and these do not all have the same deadlines. We have different financial goals at each life stage.
A good part of these financial goals will be focused on the short or medium term. That’s where the cell phone, annual vacations, saving for a wedding or preparing to change the car come in. These are goals that we hope to achieve in relatively short periods, from a few months for the mobile phone to a few years for the wedding or the car.
In fact, each of these goals involves using different investment products and also different savings strategies. For example, for your vacation or to replace your cell phone, it may be enough to use savings challenges designed for beginners, such as the 52-week challenge, where you can save 1,378 euros in a year. You can also resort to something simpler, such as setting aside extra income to cover vacation expenses.
For other goals, such as a wedding or a new car, you can invest the money in the short term, if you are able to plan well in advance. For example, you could save that money in an interest-bearing account or a deposit, if you have more than a year to spare. You could also use money market funds or conservative investment funds.
Why keep part of your savings for the long term?
Most often, your head is focused on short- and medium-term goals. After all, these are the most numerous and also the ones that offer immediate gratification. Who doesn’t think more about their vacation than planning for retirement or saving for the long term to buy a house?
That is why it is so important to:
Take a moment to set those long-term goals.
Make sure you save a certain amount of money for the long term (to prepare for retirement, for example).
If you don’t, it’s very easy for day-to-day life to eat up all your savings capacity.
Earmarking part of your savings for the long term and doing it as soon as possible helps you to:
Visualize and be aware of those goals, which are usually among the most important, but not the most urgent.
Reduce the effort required to achieve them, as you have more time to save the amount you need for your retirement, for example. If you need to accumulate 150,000 euros and you have 42 years to do so, saving 297 euros a month will be enough. If you wait 10 years before you start, that amount will be 390 euros per month.
Have greater peace of mind today, because you know that you are on the road to achieving your long-term goals and, at the same time, that you have an emergency cushion for short-term unforeseen events.
The difference between setting aside a percentage of your savings for the long term, or not, is enormous.
How can you achieve this?
This is the theory, but how can it be carried out in practice? The easiest way is to apply the savings method that we explain in this article. It consists of separating that amount at the beginning of the month through an automatic transfer that sends it to a different account.
This way you make sure that you save every month. What if you also want to invest? For long-term goals, investment acts as an accelerator that can help you reach them sooner and with less effort.
In this respect, there are various savings options. A pension plan has the advantage that you will not be able to withdraw your investment for at least 10 years (except in circumstances of force majeure). This way you ensure that that money is for the long term. The disadvantage is that individual plans only allow you to invest up to 1,500 euros per year.
That is where you have to look for other options to complement your savings, such as PIAS, Unit Linked insurance and investment funds, depending on your circumstances, your preferences and your investment profile. The most important thing is to start and to be consistent in saving over the long term. This is how you will achieve the retirement you dream of.