Split of savings - Long, Medium Short Term Goals

Tris1993

Hi everyone,

So we all know how much we are able to save per week/month/year, my question is how do you recommend you then split those savings down into long medium and short term goals???

My personal situation is 24 years old, living on my own with a mortgage on my property. I have already got all necessity's in the house but it is still 'bare' as its my first own home and most the stuff I have isn't by choice but was hand me downs gifted to me to get me on my feet. My property is in good repair and "up to date". After ALL my current annual/monthly/weekly expenses (I mean EVERYTHING, I've even gone as far as budgeting for tyres every 2 years, and putting money aside for services based on my millage ect... and included for a weekly fun budget :money:) I am left with £82 per week I can save.
I just need a bit of help dividing that up appropriately!!!!!

Short Term - I'm classing as mini goals such as buying furniture, decorating, technology purchases, holidays.

Medium Term - Car Purchase, House Alterations (new bathroom or kitchen, carpets, boiler that kind of thing) I expect these kind of goals to be around the 5 year saving bracket, I'm not expecting to do all those things at the same time, and I wont necessarily need to do all those things but just mentioned them to give an indication of possibilities!

Long Term - Rainy day fund really accumulation for my own financial security, after all, if an unexpected event happened (Redundancy, funeral costs or similar) I **could** dip into the Medium Term pot but really, time permitting, I want this fund to take care of those situations. This is something I want to accumulate over 8-10 years.

Would be good for you to either give an opinion of what you would do in my situation and/or share your situation and how you divide up for you own goals ect... :beer:

Thanks in advance I look forward to your responses!

bowlhead99

You don't say if you have any savings built up at the moment.

Really that last section of 'rainy day fund' is the key one to get sorted before anything else.

Your needing to pay funeral costs is unlikely because most people who die have enough in their own estate to cover the costs of burning or burying them and buying a few rounds of drinks. And building up savings for your own funeral at the age of 24 seems ridiculous, as you will probably live another 60-80 years and if you don't have any funeral money in your accounts, the state or a kindly relative will pay.

But losing your job (redundancy or getting fired) is something that can happen to the best of us at short notice and require several months of lost wages before you fix the problem and start again on your career path - and being out of work is the worst time to try to get credit or loans etc. You need to have several months realistic living costs 'banked' in your emergency fund so that this isn't an issue. Along with other genuine emergencies that will come along before you get to 'long term'. Basically, you shouldn't have a long term goal of being able to pay for an emergency. You should sort that 'being able to pay for an emergency' first, and once you have a buffer, then it is worth saving up for actual things you want.

Also there will be things you are budgeting for in your 'medium term' section and thinking you have five years to save up for, and then your boiler breaks down this Christmas time, four and a half years before the savings are in place, and you don't have the requisite £1-2k to cover it. Ditto car servicing costs where you assume it will cost a few hundred every x months and then suddenly there's a bill for a grand ; or someone hits your car and writes it off and what the insurance company pay isn't as much as it really costs to get a new one of comparable quality so you're short.

So, saving up to build that emergency fund *first* is key to being able to save properly for other stuff without having to 'raid' all your different savings pots whenever something unexpected happens.

Suggestion: take 6 months off having any 'treats' such as new technology, furniture etc and build up some of your rainy day fund. £82 a week for half a year gets you £2k. £2k for most people is not enough to cover the mortgage and bills and living costs for several months of unemployment, so it's not really enough as a rainy day fund. But, it's enough to cover a new boiler, or damage from leaky plumbing, or an unexpected car expense, or to buy a last minute flight to see your best friend who's dying in a hospital in France having been hit by a truck while on holiday.

Having £2k in your 'emergency money' account is a good thing because if any of those things come up you are going to spend the money regardless, so there's no point focusing first on savings for some pots of paint or a slightly better smartphone or a five year plan to get a carpet. You would raid all of those pots in a genuine emergency. So, don't kid yourself, build your emergency fund first.

The reason I say just do it for 6 months which only gets you to £2k, when a real emergency fund should perhaps be a few grand more than that (perhaps 6 month's spending money), is that if you do it at less than the full £82 per week it will be a long time before you get the security of an emergency fund in place. If you did a token tenner a week it would be four years before you even had the £2k bare minimum emergency fund/buffer. So, you should commit to it properly. I would go all out to at least get a £2k buffer before thinking about the other 'nice to haves'...

...but after you have been doing that for 6 months and not saving anything towards technology gadgets or holidays or pots of paint to redecorate the living room, you are going to feel bored and frustrated, and you might just start spending the emergency money which is very counterproductive. So, don't try to go all out 100% for emergency fund for the whole first year because it won't work. Just build it up to £2k, which is manageable, and then take a breather. At that point, divert your £82pm 100% into your short-term savings which is the decorating and holidays and tech pot. Do this for the next four months and you would build up around £1300; you can afford to spend maybe £1k of it on a holiday and actually buying some of those other things along the way, so at the end of the 4 months you won't have £1300 but you'll have a few hundred quid in the pot.

Note at this point we don't have anything at all in the medium term pot. That's OK, because that pot is for relatively flexible five year targets not hard / urgent targets, and we are only at month ten. Or month eleven if you've taken a month off along the way for Christmas, or for something else going wrong that caused you not to have £82pw spare after all. So it doesn't matter that there's nothing in the 'medium' pot at this point, there's still over 4 years left before you'd be planning to spend from it, and meanwhile we have our emergency buffer and have paid for some shorter-term needs and still have some money put away towards the next holiday or gadget. Not a bad first 10-11 months.

From that point, split your spare money three ways:

£32pw to your short term fund is a little over £400 per quarter towards those things that you want in your day to day life like holidays, tech and a nicely decorated house. Most 24-year olds would be happy with that if they already budgeted for entertainment and going-out money and clothes etc.

£25pw into your medium term fund is £1300 a year and so four years after you start, you'll have £5k in the pot, which will help out with a car upgrade or carpets or both when you get to your 'about five years from now' target. Presumably you will have some pay rises along the way (you'll be 29 by that point and twice as far into your career), so you will potentially have quite a lot more than £5k.

The other £25pw can pad out your emergency fund because the £2k we stopped at wasn't nearly enough as a long term emergency fund. So after an extra year it will be £3300, then £4600 etc, as long as you don't actually have an emergency - in which case you'll be building it back up rather than growing it.

So to summarise, £32+£25+£25 seems a reasonable way to split the £82, but only AFTER you've made a concerted effort to kick off your emergency fund / buffer and AFTER you've then allowed yourselves some shorter term treats so that you don't go a whole year without a holiday or gadgets.

As you go through life you'll get pay rises. I would suggest when you get those you spend 25% of the extra net income on day to day spending and short term savings (i.e., living) ; 25% increasing the medium term savings; 25% boosting the emergency fund; 25% on proper long term investments (pension or S&S ISA/LISA, i.e. investments rather than cash savings).

Enjoy!

LHW99

There is no mention of pensions - contribute as much as you can to get your employer's maximum contribution - free money after all.

TomSurrey

First brilliant that you're thinking about budgeting and saving at 24, I remember at that age just about the only real financial planning I was doing was bashing a decent percentage into my pension and trying to put as much as I can into saving for a deposit for my first house (which I didn't buy until I was about 30).

I'd agree with the LHW99, in 25 years you don't want to dread retirement, putting a few quid aside now especially with matching employer contributions and tax breaks etc is one of the toughest but best decisions you'll ever make.

bowlhead99

TomSurrey wrote: »

I'd agree with the LHW99, in 25 years you don't want to dread retirement, putting a few quid aside now especially with matching employer contributions and tax breaks etc is one of the toughest but best decisions you'll ever make.

I agree that contributing as much to the employer pension as is necessary to get the maximum employer contribution they're willing to offer (i.e. free money they're willing to give you, that you won't get if you don't participate) is something that should not be turned down - it's a no-brainer even if it means deferring some savings goals.

As the OP had said "...After ALL my current annual/monthly/weekly expenses (I mean EVERYTHING..." my assumption was that they'd be contributing to an employer pension scheme. But if they are only putting in the bare minimum, and more employer money is available if they put in more themselves, they should put in more until the employer won't add any extra. Sometimes employers just give you as much as they will ever offer while you do the bare minimum or even zero, but in other cases you have to volunteer to put in more yourself and they'll match or part-match it.

At only 24 without huge amounts of disposable income they are probably not higher rate tax payer, so it's not particularly compelling to voluntarily contribute any extra right now over and above whatever amount gets the max free money from the employer. Later in life, they might become a higher rate tax payer and be able to save high amounts of tax through extra pension contributions, and it's a good thing to take advantage of that when they get there.

Without an emergency fund or short term savings funds or medium term savings funds there is no point looking at 'investments' yet, other than the employer pension to grab the maximum available free money; but a portion of future pay rises should go into an 'investments' pot whether inside or outside a pension as you're right, it'll be a cause of regret if you don't have a 'nest egg' as you approach middle age.

Tris1993

First of all..... WOW!!!

Was not at all expecting that kind of response!!! Thank you all so much for your valued inputs!!!

Especially bowlhead99, I bet that took you nearly an hour to write and to put such a concerted effort into helping somebody (me) who you have never met I truly applaud you and everything you say rings completely true and rational.

To answer a few of all your questions/assumptions:
I am contributing into my pension to the maximum that my company will match 3% approx. £20 pw so with their contribution £40pw (weekly paid salary), but for the moment I'm not contributing any further as I have more pressing saving needs at 24 years old but I would be silly to turn away free money. Again Bowlhead99 I'm not quite at the higher rate tax but like you said later in life this is something I would do for a good pension and tax relief purposes.

As regards to current savings it sits at around £500 (and growing), reason being is I have recently had to replace my first car that I had for 6 years, it had got a little long in the tooth at 12 years old and 120,000 miles - it was still a good runner but had just had to replace its turbo (diesel, not a boy racer) and the clutch was on its way out among other things that were going wrong and needed money spending on it + it was getting ready for a full new set of rubber, so all in all it would need about £1500 spending on it very shortly and that's me doing all the work myself!!! (which I'm lucky I have the know how and tools to do so) - Unfortunately I have had to purchase this new car (3 years old) with a personal loan due to only moving into my new house not all that long ago, but as a consequence I never want to have to go down the finance route again despite the interest been a pitiful 2.9% as far as I can see that 2.9% more than I should be paying!!! However I don't want to prioritise paying my car off over savings for emergency's ect... as over the 5 year personal loan term the interest will only cost me £1000 which if you adjusted for inflation over 5 years (i.e if I had to save up for 5 years to by the car instead) this is negligible anyways.

The idea is my newly prioritised emergency savings fund would be able to cover the monthly repayment should I loose my job ect...

Also planning on keeping this car for 10 years, I like to have a nice motor but I'm not victim to the need of having the latest model ect... I have bought a Volvo estate so it should be able to cope with whatever the next 10 years has to throw at me and reliability shouldn't be a major concern, my last car was a Volvo and I trust in there build quality - the last one was trouble free throughout my ownership until recently at 12 years old as aforementioned.

TomSurrey - Thank you for the compliment that definitely put a smile on my face, I actually bought my first house when I was 19 years old (50/50 with my ex) and didn't buy it from inheritance or anything like that, I started my precision engineering apprenticeship when I was 16 and saved for a house deposit from day 1, I made quite a chunk of money (approx. £10k after expenses) when we split up and sold that so my "first own house" is now a 4 bed semi on a nice estate with a double garage (Derbyshire, I'm not suffering from city premiums for space luckily) so planning pays off!!!! you may think it is a little ridiculous rattling around in a house like that on my own but again its future planning at 24 how long will it be until I have kids??? 2-6 years probably so that was my reasoning for buying it and if that doesn't work out then it would still be a decent investment if I remained single for the rest of my life (which is pretty unlikely) and downsized. Wanted a big garage as been an engineer I like fixing my own cars, building things and toying around with motorcycles ect.... and own a lot of tools that need accommodating, The age old saying goes "If you want a job doing properly, do it yourself!!" after me having a few unpleasant experiences with several car garages. (I'm aware there are many fantastic garages out there, I just haven't been lucky enough to find one, it doesn't help I know what I'm talking about so when they try and blow smoke up my !!!! I know!! consequently I call them out on it, ask for my keys then disappear into the sunset)

Definitely going to prioritise my emergency fund, I guess I don't see the job security as a major issue as there are more engineering jobs than there are engineers left in the country (in my sector anyways) but you never know what is round the corner and yes your completely right, at current standings, if I didn't prioritise this and my boiler failed this Christmas or my friend go hit by a bus in France I would be a little bit FUBAR'd.

So so grateful for all your inputs - Genuinely didn't expect it

chockydavid1983

You're not wrong, this is an amazing forum and Bowlhead writes many essay length responses :-).
Sounds like you're doing great and I'd echo what others have said- keep maxing out employer pension contributions and build up a decent emergency fund and then you can start to think about S&S ISA and/ or additional pensions contributions.