There is really not much difference between spending and saving. All money is spent – it is just a question of when. When you receive money, you can choose to spend it now, a little bit later, or a lot later. Ultimately, money you don’t spend during your lifetime will simply be passed on to someone else to spend. Saving is therefore just deferred spending.

What you do with money you wish to spend later depends on the time frame in which you estimate you will spend it. Savings therefore need to be split into three categories:

An Emergency Fund

This is money you might need to spend now. It covers unexpected expenses such as car repairs, dentist and medical expenses, or home maintenance, and unexpected loss of income from sickness or redundancy. Use a high interest at-call savings account for accessibility and save a regular amount into it to keep it topped up.

Medium Term Savings

Money you plan to spend a little bit later, say within the next three to five years, could be accumulated in your emergency fund and transferred to a term deposit or similar investment that pays a reasonable rate of interest and does not change in value. The amount to save should be whatever you need to achieve your goals, which might include travel or home improvements.

Long Term Savings

Finally, there is money you plan to spend a lot later, for example in retirement. Over a long time frame, your savings will need to earn a higher rate of return to keep ahead of inflation and tax and you could therefore consider saving into a diversified investment product that has some exposure to property and shares which grow in value. Until your mortgage is paid off, use only KiwiSaver for long term savings.