As I’ve mentioned before, I maintain multiple savings accounts at various institutions, mostly in an effort to keep my different savings goals in discrete places. For the most part, I only deal with two: one is an emergency fund, and the other I refer to as my “short term” fund.
What’s a “short term” fund? A short term fund is savings intended to be spent on a large ticket item within two years, such as a vacation, an auto purchase, a home refurbishment, and so on. Generally, these function well if you automatically put a certain amount into the account each week and allow it to build up.
Why? Such a fund ensures that the big ticket items in your life do not equate directly to more debt. Instead, you can have the item and not have the payments (and the money-draining interest that goes along with it). In effect, not only are you gaining the interest from saving, you’re also gaining even more by avoiding the interest you would pay on the payment plan, making the entire effort worth quite a bit of money (well over 10%).
What’s the best vehicle for such savings? A high-interest savings account, like the one at ING Direct, is the best choice for a short term fund like this one. This type of account can earn around 5% (depending on the exact interest rate at any given time) and it’s very liquid – you can pull the money out at your leisure. Both factors are vital for setting up a short term account.
Give me an example. Let’s say that George wants to take his wife on a trip to Italy next summer. He calculates that the trip will cost about $5,000. So he divides $5,000 by 52 and sees that he’ll have to start putting away about $100 a week. He follows something akin to the Andrew Jackson plan for a year, putting away a small amount each day and depositing the money each week into his account, and at the end of the year, he has the cash on hand to pay for the entire trip, plus a little extra earned from the interest.
How are you using this? Right now, I’m using the “short term savings” account to save for closing costs for my home purchase. Once that is complete, I am going to use the Andrew Jackson plan to save for a van. According to my calculations, we should have enough to buy a nice van at about the time we’re really going to need one, given our family growth.