Santa’s coming! Three steps to save for short-term goals

It’ll be Christmas soon, doesn’t it come round quickly? Whether you have children, grandchildren, or neither, it’s often one of the more expensive times of the year. Time to let the belt buckle out a notch and indulge a little!

According to the Bank of England, the average household spend increases by more than 25% in the run-up to Christmas. In fact, alcohol spending alone increases by 30% during December.

If you’re planning on buying gifts for loved ones, a few evenings out to celebrate, or going on holiday to escape the British drizzle, you’ll need some savings earmarked. After all, a skiing holiday in the Alps can easily cost upwards of £1,000 per person this time of year.

You may be used to saving towards long-term life events, like retirement, but saving for short-term goals, in under five years’ time, requires a completely different strategy.

Step 1. Define your goal and rein in spending

Naturally, the first thing you need to identify is what you’re saving towards and what it’s likely to cost. There are two ways of working out the necessary commitment to achieve that goal;

  • By defining how much you’d like to save each month, dictating the timescale
  • Or, having a set deadline, like Christmas, dictating how much you will need to save over time

Reining in frivolous spending is the quickest and simplest way to make a real difference to your efforts.  Cutting out some non-essentials in the short term, like dinners out will quickly add up. There might even be some long-forgotten subscriptions or gym membership you no longer use, it’s quite common. In fact, research from Moneywise has found that on average we’re wasting over £21 a month on subscriptions we very rarely use; over 12 or 24 months that saving can really add up.

Step 2. Minimise investment risk

Investing over the long term typically comes with inherent investment risk, as a result of wanting to achieve higher returns. This is perfectly acceptable when investing for more than five years. In reality when investing, the longer the better, as any market fluctuations and volatility are smoothed out over time.

It’s been ten years since the 2008 stock market crash. If you were investing in stocks and shares for the short term, it would have been a disaster. We’ve experienced a bull run in the market since; ten solid years of steady growth. If you were investing for the long term, there was plenty of opportunity for your portfolio to bounce back and grow.

Step 3. Find the right product

When thinking short term, with interest rates as low as they are currently, a cash investment is unlikely to significantly beat inflation. It is still absolutely the right way to save, as you will minimise the impact of inflation, if not make significant gains, whilst minimising risk.

Having the savings in a current account with initial interest or a poorly performing savings account, in growth terms, is as counterproductive as keeping cash under your mattress. In terms of products currently available, there are regular saving and lump sum options available:

  • Savings Accounts: Regular savings accounts are appropriate if you want to make regular monthly contributions. Setting up a direct debit or standing order with a defined sum is the easiest way to stick to your plan. Currently savings accounts offer around 1.5% AER easy access, up to 2.7% fixed, with restrictions to consider on minimum and maximum contribution, defined by the provider.
  • Fixed Rate Bonds: For a lump sum investment, a one-year term Fixed Rate Bond currently provides just over 2% AER interest, with a minimum investment dependant on the provider. Granted, this doesn’t outstrip the current inflation rate of 2.2%, but it does mean your money will be safe and not losing purchasing power over time. If you’re planning for a little further ahead, three, four or five year Fixed Rate Bonds may offer as much as 3% AER at present.

Cash ISAs are also an option, but you may have used your ISA allowance as part of your longer-term financial planning. If not, they may be worth exploring, but are likely to offer similar rates of interest as Savings Accounts and Fixed Rate Bonds.

If you like the idea of getting away next Christmas, or really treating your friends and family, the most important thing to remember is to minimise the risk of your investment. Whatever your short-term aspirations, if you’d like to discuss achieving them in more detail, please get in touch.

Finally, Merry Christmas everyone!