Mid-term savings have a time horizon of a few years and are larger in scope than short-term savings. Examples of mid-term savings might be a car replacement fund or a down payment on a house. This money may be conservatively invested or kept in cash-equivalents depending on the timeline and the risk tolerance of the investor.
Protect and Grow Wealth
Retirement savings is likely the longest-term savings goal you can set, and yet it is so beneficial to save for it early and continually because of the time value of money. The time horizon for the goal is so long that you can invest the money aggressively when you are younger and gradually shift the asset allocation to be more conservative as you near your retirement date. It is advantageous to invest your retirement savings in a tax-advantaged account like an IRA or 401(k) so that the money can grow tax-free.
As a graduate student, you likely do not have access to a workplace-based retirement fund like a 401(k), 403(b), TSP, or 457. If you have taxable compensation, though, you can contribute to an IRA. In 2015, the most a person under 50 can contribute is $5,500 or the amount of earned income, whichever is lower. Additionally, if you have a side hustle and are self-employed, you may want to set up a retirement account for self-employed individuals (solo 401(k), SEP IRA).
Once you decide to save for retirement such as in an IRA and confirmed that you have earned income, you will have to decide whether to open a Roth or a traditional version.
Further reading: Even Grad Students Should Have a Roth IRA
Short-term savings accounts come by many names and can have many purposes. The money in a short-term savings account is likely to be used within one or two years and therefore should be kept in cash-equivalents like savings or money market accounts.
Emergency funds are a type of short-term account that are set aside for use in emergencies only.
You can save regularly into a system of sinking funds or targeted savings accounts to help smooth out large, irregular expenses. An example is to save a certain amount every month for travel expenses, though you only travel a few times per year. That way, the cost of a flight or lodging does not overwhelm your cash flow in a given month.
Goal-based savings are straightforward to set up. You set a goal to make a certain kind of purchase at a certain time and estimate the cost. Just divide the cost by the number of months you have to save up for it and set your monthly savings rate accordingly.
An opportunity fund or general savings account is another stash of money that can have a more flexible purpose than an emergency fund or the other short-term types of accounts. This money could be used for unexpected opportunities or expenses that don’t qualify as emergencies or as a slush fund for when your cash flow is short in a given month.
Savings can be categorized by purpose and/or length of time until they are needed. Short-term savings that will be needed within about a year should be kept in cash-equivalents like savings accounts, no-penalty CDs, and money market accounts. An emergency fund is a type of short-term savings. Mid-term savings are for goals or purchases that will be made within a few years, and may be kept in cash-equivalents or in conservative investments. Long-term savings will be used at least five or ten years out from the start date, and can be aggressively invested. Retirement savings are a specialized type of long-term savings.
Further reading: How to Set and Achieve Savings Goals
|Type of Savings||Time Horizon||Investment Type|
|mid-term||2-5 years||cash-equivalents and/or conservative investments|
|long-term||5-10 years and longer||aggressive investments|
|retirement||until your target date (likely decades)||aggressive investments (appropriate to time horizon)|