Saving for short-term vs long-term goals: which accounts could suit you?

Different accounts are generally best suited to short-term and long-term savings goals. Short-term savings generally benefit from the flexibility of easy access accounts, whereas long-term savings can benefit more from the compounding interest potential of fixed-rate bonds. Many savers will open both kinds of account to divide their savings into the places which best benefit their differing goals.

How do short and long-term goals differ?

Short-term savings goals generally span anywhere between 1-3 years into your financial future, with some more immediate goals landing in less than 12 months. Examples of these short-term goals can include planned holidays, car deposits or even building up your emergency savings pot.

Long-term savings goals, meanwhile, often represent building 5-10 years into your financial future. Examples of these can include growing your pension pot, raising funds for large-scale housing extensions or even a deposit on a home.

How much access will each goal need?

Short-term savings goals generally benefit from flexible access, meaning an easy access savings account can offer specific benefits of immediate withdrawals and being able to deposit funds as frequently as you want. If your short-term savings goals include building up emergency funds, then an easy access account can be particularly beneficial for allowing you to withdraw this money as soon as you may need it.

Long-term goals naturally require less immediate access and so many people explore the option of fixed-term bonds, which offer the benefit of competitive and consistent interest rates. The longer your money is saved in one of these accounts, the higher the compounding potential, allowing you to benefit considerably if you can afford to put away a lump sum for several years without needing to access it in the meantime.

When might fixed or variable rates fit?

A fixed rate allows you to benefit from consistent interest earnings across an agreed period of time within a fixed-rate bond account, which frequently fits long-term savings goals as many people will not need to access those funds for extended periods of time.

That said, variable interest rates do not necessarily always mean lower interest earnings. If somebody locked in a fixed-term bond for several years, there is a chance that variable rates could eventually rise beyond the consistent rate initially offered by the fixed bond, which you’re stuck with for the duration of the fixed term. As a result, it can be helpful to weigh up how long you want to fix savings for and not assume that the longest period will always offer the best return.

How can separate accounts help?

Separate savings accounts allow you to diversify the purposes of your funds. For example, many people will regularly save into easy access accounts which are geared towards their short-term savings goals, while also having a fixed-rate bond account which holds a lump sum geared more towards their long-term savings goals. In this way, holding more than one account at a time allows you to cover multiple financial bases.

Saving for short-term vs long-term goals: which accounts could suit you

In summary:

• Short-term savings goals are usually planned 1-3 years into the future and can include examples like upcoming holidays, car deposits or the building of an emergency fund.
• Long-term savings goals can span 5-10 years or more into the future, with examples including a housing deposit, major extension works to a home or the building of a pension pot.
• As a result, short-term savings generally benefit from easy access accounts and long-term savings can benefit from fixed-rate bonds.
• Fixed interest rates do not automatically offer more earning potential than variable rates, especially if a fixed rate lasts for several years during which time base rates could ultimately rise beyond its initial rate.
• Opening separate accounts for your different savings needs can be a helpful way of benefiting from the individual pros of each account type to best suit the different purposes of your savings.

Frequently asked questions

What is the difference between short-term and long-term savings goals?

Short-term savings goals often relate to immediate planned purchases, such as upcoming holidays or expected expenses such as mortgage payments. By contrast, long-term savings goals can be guided towards options such as building your pension pot, housing deposits or buying a car.

Which type of savings account could suit a short-term goal?

Easy access accounts are generally preferred for short-term savings goals, as they allow you to deposit and withdraw funds as frequently as you want.

Which type of savings account could suit a long-term goal?

Fixed-term bonds can prove beneficial for long-term savings goals. While they restrict access to your funds for the duration of the agreed term, they also provide highly competitive and consistent interest rates, allowing for strong compounding potential when you can afford to save a lump sum away for an extended period.

Should I choose an easy access or fixed-rate savings account?

This depends on the purpose of your savings. Emergency funds and short-term savings are often best suited to easy access, whereas idle long-term savings can be better suited to fixed-term bonds. You’re able to open both types of account to suit the different purposes of your money.

How much access might I need to my savings?

This depends on how frequently you feel you’ll need to access them. Savings that you’re building for short-term goals such as holidays or mortgage payments will naturally need more access, however long-term savings with no set future purpose such as a pension pot will likely require less access.

Is a fixed or variable interest rate better for my savings goal?

A fixed interest rate can allow for greater compounding potential, especially as fixed accounts will often lock your money away for an extended period. However, variable rates have got the potential to rise beyond a fixed rate if it was locked in before a base rate change. As a result, regularly reviewing your savings accounts can be helpful to ensure you’re still achieving competitive rates.

What should I compare when choosing an account for my savings goal?

Look at the interest rates, access rules and if applicable the length of a term on any fixed-rate bonds. Comparing each of these elements can help you make the best choice for your needs.

Where can I check the latest rules and product terms?

You can compare accounts and check the latest rules & terms here.

Next steps

If you want to explore further helpful information on savings for short-term vs long-term goals and which accounts could suit you, see below:

Explore savings accounts

View current interest rates

View all savings products

View fixed rate bonds

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