Bucket 2: Short-term savings
Fortunately for us, most expenses aren’t emergencies. But we all have expenses coming coming in the near future that we need to prepare for. Bob’s off on vacation to Hawaii in 6 months.
What does “short-term” mean here? In the next 5 years.
But that doesn’t sound short-term?
Yes it doesn’t, who can project 5 years from now.
But this is important because the stock market can go up and down a lot in the short-term, and we need to have enough money for our short-term expenses so we aren’t forced to sell. Don’t forget rule #1.
Where do these short-term savings go? A savings account is as good a place as any with the high interest rates available today. If you want to earn a little more, you could lock it into a short-term CD account.
Does Bob have all of the savings he needs for the next 5 years of spending in his short-term savings? Probably not. He can’t tell the future. But he has savings to cover the expenses he expects to have, plus a margin of safety for any surprises.
Exercise: What expenses do you see on your horizon? An expensive vacation? A car purchase? A downpayment for a house? Money for an upcoming relocation? How much do these come to? Do you have this money in your savings account, or can you easily cash-flow it in from your paychecks so it’s available in time for these expenses?