"Man, I understand this emergency fund you keep talking about. I also understand long term – you know when I will retire and relax. But what is this "short-term" money? "
A weekend conversation with friends turned to the Scripbox approach to investing and one of my friends made this remark.
At Scripbox, we believe that everyone has 4 kinds of money – Spending Money, Short term money, Long Term Wealth and Tax Saving Money. While tax saving, long term, and spending money are kind of specific in their objectives, short term money can be a gray area for some - like my friend.
So what's short term money?
Let's take an example. Please answer the following questions for yourself:
Q.1 Is there something significant that you are planning to buy in the coming 5 years?
Q.2 Is it something that is worth at least 10-12 months of your take home salary?
I'm sure at least 2-3 things came to your mind. The money you need for these 2-3 purposes is your short term money.
It's likely that what came to your mind would be one of these or similar:
- Down-payment for your home
- Refurbishing your home
- Buying a car - at least part payment.
- Education related expenses for your children
- An overseas family vacation
Isn't my Short-Term Money also my Emergency Fund?
No. Your emergency fund is meant for only when it's truly an emergency. This can strike at any time and needs faster accessibility. It also has to be separate from your short-term goals - what if you just paid your home down payment and faced a health emergency?
Why save up when I can take a loan and pay EMI?
Frankly, that's up to you but it's a good rule to limit borrowing to assets that go up in value and not for consumption.
So, is it an exact amount?
The amount will be worth whatever your goal demands. For example, a down payment for your home worth Rs 40 Lakh could be 20% of the home value or Rs 8 Lakh. So that's what you need to save.
Shares or equity funds are not a good option for Short Term Money
Since short term money is meant to be used in the next 3-5 years, you don't need to beat inflation, and the extra return of equity comes with much higher fluctuation in the short term. This is money that you need with higher certainty - you don't want to defer your child's college admission.
Only fixed income investments such as Debt Mutual Funds (including liquid funds and debt funds ) or Fixed / Recurring Deposits make sense for short term money.
P.S. Want to know the best way to save and invest for short-term money for yourself? It's called Scripbox Short Term Money. Why not create an account and try for yourself?