Which is more important, my short-term savings or my long-term savings?
How much should I have in my short-term savings in this financial climate?

Hello my name is Ron Blue and I want to talk to you about savings – short-term savings and long-term savings. Which one is more important? I would say that the one that is the most important is your short-term savings; you need three to six months living expenses in a savings account. Why? ...for the unexpected, for the emergencies. Perhaps even for a loss of job or some medical emergency, the car breakdown, the repair that you didn’t anticipate, maybe the opportunity to give someplace that you didn’t anticipate.

Everybody needs as one of their first priorities, to pay off all of your short term debt and then, secondly, to get three to six months of living expenses in your savings account. Then, you can begin to save for the long term. Maybe the lifestyle change that you are working toward: a home or a car or something that you want to do…retirement, education…something like that.

ere is a principle: financial maturity is being able to give up today’s desires for future benefit. If you started at age 25, and if you saved $83 per month for the long term toward your retirement, you would save $1000 per year. If you saved $1000 per year for a working life (40 years) you would have saved $40,000 toward retirement. Now, depending upon what interest you earned on that, let’s assume it was 12.5%, (the reason I choose 12.5% is that’s not an unreasonable amount to earn over the long term - not in the short term - but over a 40-year period, it’s not unusual to be able to earn that kind of return), your 40,000 would now be worth 1,000,000. You would have given up $40,000 of today’s desires for future benefit, which would have allowed you to save enough, probably, for retirement.

Another place that I would always recommend that people save is in their 401k’s or their 403b’s where there is any type of matching done by your employer. That’s always a good return. If your employer matches a third of it, or 10% of it, or 20% of it of what you put in there, it’s a good deal to put your money in there. Even if you did not invest it, it’s a good deal because of the initial return that you get.

We have, on other places on this website, a diagram called the “11 buckets diagram.” It is the financial decision making diagram and it helps you see the difference between the short term and the long term. And again, remember that you are always trading off the short term for the long term when you make a decision to save for the long term. (Note – this is a “coming soon” feature on the site – it is not up yet.)

The best feeling that you can have is to have the money in savings when that emergency or that unexpected expense comes up. And, what you’ll find over time is that if you have savings, when that expense comes up, and you take the money out of savings, you really don’t feel comfortable until you put the money back in, because it’s very comfortable to have that saved for the future.

People that have done that are able to withstand almost any type of adversity or uncertainty in their financial situation – be it driven by our economy, our government, the stock market, or their own emergencies that come along.

So I would say, that if this has been helpful to you, share how it has been helpful to you on the website. Engage in conversation with others who are listening or watching also. We need to know what you’ve experienced and we need to encourage one another in making these hard financial decisions.


Click here for the November 6, 2008 Blog Entry