Long term vs short term savings and investments.
The difference between long- and short-term investments and savings comes down to time frame. Long term is generally a time frame from five years onwards and include investing and saving for your dream house, your child's university fees when he or she is born or becoming debt free.
However, the most important long-term goal revolves around retirement and being able to retire and maintain your current lifestyle. Saving and investing for the long-term, requires patience and consistency.
Short term savings and investments are typically a period of 12 months and shorter. Here savings and investments are made to achieve goals within the next 12 months, and because of that different asset classes are used in comparison when investing and savings for the long term:
Long term: >5 years
When savings and investing for the long-term, growth assets like induvial shares, Unit trusts and ETFs should be included within your portfolio. These assets although risker than cash instruments for example, help boost returns and risk is managed due to the longer timeframe.
Remember the longer the time frame, the less volatility will impact your investment as assets have enough time to overcome short term market moves.
Examples include:
Retirement is the most important long-term goal, and thus the majority of funds should always be allocated to long term savings and investments. Due to the longer time frame, risk is reduced, as asset prices have time to recover and perform in adverse market events.
Short term: <12 months
The most important short-term goal is having an emergency fund set up, so that long-term savings and investments are never interrupted. Having three months salary put away means having that back up when you need it.
Due to the shorter time frames and immediate need of use, short term cash instruments like savings account and notice deposits can be utilised. You don't want to be investing your short-term savings in high growth assets, as volatility risk will then be at its highest and assets will not have enough time to perform. Your savings must be accessible within the next 12 months and its very important to match the time frame of the goal at hand to the time frame of the saving vehicle being used:
Examples include:
In Closing:
A final consideration is that long term savings and investments must always contain the majority of wealth. Three months' salary is always a good milestone for maximum funds allocated to shorter term goals.
The reason, returns are smaller when placed into asset classes for the short term. Any excess capital will thus be losing out on the opportunity to grow and compound over the long-term. As cash is needed in an emergency, less risky assets need to be used, thus smaller returns will be earned. Thus, it's important to allocate capital accordingly, to ensure enough is saved as a safety net, but that additional capital is enjoying higher rates of return over the long-term.
