Short-term vs long-term savings for your child’s education is a common dilemma for parents who are trying to secure their child’s dream via quality education.
Nothing is more important than a kid’s future, and education can open doors of opportunities for better personal and professional life.
Parents have to create proper education plans to deal with the rising cost of education. They have to save and invest promptly in worthy investment schemes that will yield the highest possible returns.
Which of the investment schemes is better, where should one invest, and is short-term better than long-term savings or vice-versa are important questions that need to be answered before creating an effective educational plan for your child’s higher education?
Let us identify the differences between short-term vs long-term savings based on different parameters to understand the purpose they can fulfill.
Difference between short-term vs long-term savings
1. Meaning
Short-term savings are used mostly to deposit excess funds for a shorter period. These are highly liquid and predictable schemes that can meet any unexpected future expenses.
The long-term savings, on the other hand, cannot be easily liquified, nor can they meet any unexpected expenses.
2. Goal-based
The short-term investment is created to meet immediate savings goals, whereas the long-term investment is created to meet long-term savings goals.
3. Tenure
The timeframe of short-term and long-term savings plans vary as the former is for a small duration that lasts between 0 – 1 year, and the latter is for a longer duration as the investment tenure lasts for 5 years or more.
Additional read: Personal loan vs education loan
4. Risk and return expectations
Every investment has some amount of risk and returns attached to it. It is the difference between the two financial instruments, short-term and long-term, that determines the amount of risk and return expectation.
Short-term investments show a lower risk for capital preservation and stable return expectation, whereas long-term investments show a higher risk incurred over a longer tenure in expectation of capital growth.
5. Purpose
The purpose of the investment matters a great deal. If you are in the later stages of the investment horizon, and it is time for withdrawal, then it is better to gradually stop long-term investment schemes and shift them to short-term savings like FDs and debt instruments.
The purpose is to make the investments safe and secure, as short-term savings are considered safe compared to long-term savings schemes.
Thus, when the purpose of the scheme is principal protection, then short-term savings plans are the best option, but if the purpose is high returns, then long-term investment schemes are the better options.
Additional read: How to set financial goals?
6. Investment vehicles
Investment vehicles to achieve short-term goals are savings accounts, FDs, treasury bills, Gilt funds, and debt mutual funds.
These are safe and secure vehicles with very low risk. Whereas the vehicles to achieve long-term goals are real-estate, mutual funds, ETFs, and equity/shares with high risks.
Choose from an option of 4000+ direct mutual funds and take a SIP for as low as INR 100 on the EduFun app if you are interested in saving for your child’s education.
The app also offers the best US ETFs for a child’s education as well as ELSS funds that help parents in saving tax while investing in their child’s education corpus.
7. Rate of interest
The interest rate for a short-term savings plan is less than that of long-term plans. A savings account offers an interest rate between 3% to 4%, whereas the rate of interest for an FD is 5% to 7%.
The rate of interest for long-term schemes like mutual funds is way high as it shows an estimated return between 12% to 16%. Equity-oriented mutual funds with a holding period of more than 3 years generate nearly 15% returns.
8. Power of compounding
The power of compounding makes the long-term investment yield higher returns, whereas short-term investments are unable to take advantage of the compounding power to the fullest.
9. Accessibility
Short-term savings plans are easily liquified and accessible, whereas it is difficult to break the long-term schemes. Although the interest earned is small on the short-term savings plans, it can be withdrawn at any given time.
The long-term savings plans, on the other hand, are more or less fixed for a definite tenure. In some cases, the investor can withdraw a part of the savings after a definite tenure but withdrawing the full amount is a bit trying.
Conclusion
Short-term and Long-term savings plans are equally important to create an education corpus. It is important to note that a proper education plan must cover both short-term and long-term investment schemes.
The right balance will yield some of the best possible returns to help parents to fulfill their child’s desire for a good education.
