Saving for a rainy day... (Part II - Medium-term savings)

In Part I of my Saving for a Rainy Day series, I went over some thoughts and ideas about long-term savings, primarily saving for retirement. In this post we will review medium-term saving. I would define medium-term saving as anything that will take longer than 18 months to save for. So, this could be saving for a car, house, your children's education (even if you don't have children yet), etc. (Oh, if you are currently making car payments and you plan to buy another car at some point in the future, I thought this was a great tip.)

The most important part about medium-term savings is making sure that you follow through and actually save. I mention this because unlike with a 401k, no one is going to pull your medium-term savings out of your paycheck for you. However, you do have some options to make saving a little more automatic than you might think. Below I will suggest some companies that can help you save for the medium-term.

As I mentioned in Part I, you want to make sure your medium-term savings comes out of your budget after your long-term savings, but before most other expenses. This would require you to have a budget. When I say you need a budget, I don't mean a general idea of how much you spend each month, I mean a real, written budget. The simplest solution to the "I don't have a budget" quandary is Pear Budget it needs a program such as Excel to run, but if you don't have Microsoft Office, OpenOffice is a good (free) alternative.

Now that you have a budget, figure out ways to trim money from it. Some examples include:

• Reduce your cable plan to basic or cancel it all together. Then, when you need to be entertained, check out a book or DVD from the library (no commercials).
• Make coffee at home instead of going to Starbucks.
• If you can't cut Starbucks out completely, go to the gift card approach. If you typically spend $40 a month at Starbucks, buy a gift card for $25 and force yourself to make that last for the entire month.
• When you are about to buy something use Google Product Search or Frucall to make sure you are getting the best deal.
• Cancel your home phone, you are already paying for your cell phone and I don't think I am going to talk you into giving that up.
• There are plenty more examples of ways to save money, and once you start reviewing your budget and where you spend your money, you will start to realize ways to put more money towards savings.

OK, now that you have discovered ways to save a few more dollars each month, I would encourage you to consider investing them. Yes, investing money is a bit riskier than simply putting it in a savings account with a guaranteed interest rate. But, accordingly the returns from investing are quite a bit higher than the average savings account's interest rate. You can always be conservative, investing in a fund that tracks that S&P 500 or the Dow Jones has, over time, been a safe bet. If you want to invest in a selection of stocks, a mutual fund, or an index fund take a look at ShareBuilder. I think this is a great medium to long-term investing service. Basically you agree to invest a certain amount weekly or monthly and in exchange they give you great rates on their investment fees. In addition they don't care how little you invest, so if you are just getting started on the investment wagon, this is a great tool.

If stocks, index funds, and traditional mutual funds are too risky for your blood you can look into things such as corporate or municipal bonds. Another lower risk option would be putting your savings into a Money Market account. I hold one at TD Ameritrade and I have been relatively happy with their service and product offerings. If all these financial terms and savings and investment options are freaking you out I would suggest that rather than hiding in a hole and never saving or investing anything that you consider talking to a financial adviser. If you want to stick with a good ol' savings account for your medium-term savings, stay tuned for Part III of the Saving for a Rainy Day series, Short-term savings.

To be continued...
Part III - Short term savings (coming soon)

Previously:
Part I - Saving for a rainy day... (Part I - Retirement)