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What's Your Long Term Savings Plan?

Long term savings are a necessary component of any successful finance plan. There are unlimited ways to spend your money – but almost as many ways to save it, too. The key to reaching your financial goals is to save money for the long term.

Remember when you were a kid? Putting your loose change in the piggy bank was pretty simple. If your parents tried teaching you solid financial skills as a child, you maybe even had to set aside a portion of all of your birthday money for savings, too. As adults, we grow up to find that saving money isn't as easy when you've got to decide how much and where to save your money, and when you've also got to pay for living expenses.

Saving money over a long period of time requires mental commitment. It requires honesty over where your money is currently being spent or used when it's not being saved. Not all of your spending is considered “wasted”, but there is a good possibility that much of the money you spend could be avoided and therefore used to increase your savings.

By definition, long term savings is money you set aside for the future. It's not meant to be your emergency fund, vacation money, or to replace your kitchen appliances. Long term savings are typically started when children are born to save for their college or your daughter's wedding; or the money you set aside each payday for your retirement.

For your emergency fund or other short term savings, it's necessary that you can access the money as needed and without paying a penalty to withdraw it. Your long term savings doesn't need to be quite as accessible and in fact – it may make it easier for you to leave it alone if it would cost you money to withdraw it before the specified date.

Long term savings options offer higher interest rates in exchange for your time commitment. The potential downside of these higher interest, long term savings options is that they may have minimum balance requirements to avoid monthly fees.

Use the Compound Interest Calculator to see how much your investment will earn at various interest rates, when invested for a specific length of time. $10,000 invested at 4% interest (with no additional contributions) would give you a total of $21,911.23 after 20 years.

If the idea of having long term savings inaccessible for 10 or 20 years scares you, you might consider using CD Ladders. Each time a CD matures, you would have access to that money, and you can select terms as short as 3 months, or as long as 5 years. Other options for long term savings include money market accounts (deposit accounts that are risk free), and high interest savings accounts.

Cerebral Barbedwire
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Also consider the tax implications of where you are putting your money. Even if you leave IRA and RothIRAs, 401(ks) and similar out of the picture, there are options. Savings bonds are free from state and local taxes. And if you use them for education, the federal tax may be waived (see your tax advisor).

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