Short term savings can be invested in checking accounts, saving accounts, money market accounts, certificates of deposit, money market funds, and short-term bonds. Each of these investments has their own advantages and disadvantages. There are different circumstances under which each type of investment may be right for some portion of your liquid assets.
Liquid assets do not mean oil or some kind of wine. Liquidity means the easy availability of an asset without much spill in between. Cash is the best liquid asset. It’s most easily accessible and is accepted everywhere. However, real estate is not very liquid. It takes a lot of time to convert it into a transferable form and in the process, there is a lot of spill in between- there are loads of commissions and closing costs. In between cash and real estate is a range of investments, with varying levels of liquidity.
If you don’t have short term savings, then you will land yourself into unfortunate things. Emergencies can arise anytime. They don’t tell you in advance that they will soon knock your door. And when emergencies arise, your short term savings can help you face them. However, if you don’t have short term savings, then you can land yourself in any of the two unfortunate happenings:
Credit trap
If you don’t have short term savings, then you will probably land yourself into a credit trap, paying double figure interests. When you get yourself into a credit trap, it will take you years to escape from it.
Selling of assets
In order to cover a certain expense or loss, you may have to sell your assets that were intended to cover long term goals. Consider this example: you have put all your spare money in the stock market and suddenly you need Rs 1 lakh for emergency. Unfortunately, this happens during a time when the market is down, and you have to sell your stocks at a loss. Also, the money is no longer invested and you will miss on the future growths.
Therefore, short term savings are very important and can help you in any emergency situation. There are several options to keep the short term money but more important is that you need to do a bit of financial self-reflection to determine how much short-term savings you need and when you'll need it.
