How to Save for Short Term Goals
By: Vincenza Vicari-Bently, AFC
March 15, 2022
You may be wondering where to park money for the short-term due to frustration with how little interest traditional savings accounts are paying. Equally concerning is that inflation is the highest it has been in 40 years! When we talk about short-term savings, we are referring to money you will spend within a six month to three-year time frame, and long-term savings is usually money you won't need for more than three years. This article will give some tips for how to evaluate options for short-term investing and saving and which options would be best for you.
Many people have short-term goals— such as a down payment for a home, a new car, a wedding, or even a dream vacation. You can invest for short-term goals, just not the same way you would for long-term investments (like retirement). In these times of high inflation, it is one of the most pressing reasons to consider investing your cash instead of having it sit in a traditional savings or checking account earning next to nothing (The national average interest rate for savings accounts, at writing, is currently at 0.06 percent).
With short-term investing the goal is to protect your principal. There are several options to consider for short-term investing but be sure to weigh the pros and cons with each option.
Here are a few for consideration:
- Money Market Account-these usually offer higher savings rates than traditional savings accounts and may also have debit card and check-writing privileges.
- High Yield Savings Account-interest rates can be 10 times higher than traditional savings accounts.
- Certificate of Deposit- nationally available CD rates are typically 3 to 5 times higher than traditional savings accounts in exchange for leaving the funds untouched for a fixed period of time.
- Short-term bonds-these invest money into bonds that mature in 1 to 3 years and offer a higher potential yield than money market funds but come with additional risks you should consider.
A great place to start researching interest rates is www.bankrate.com or www.gobankingrates.com. On-line banks typically yield higher interest rates than your regular brick and mortar banks and they can do this due to their potential lower overhead costs. These accounts and other short-term savings vehicles won’t produce the same high interest rates as long-term investing, but they will give you higher rates of return than a traditional savings account. The strategy for using them is to be able to have the flexibility to withdraw the funds quickly, if needed. Do your research to find the investment vehicle that work best for your risk tolerance and time horizon.
- Roberts, Adrie (2006) https://extension.usu.edu/archive/how-to-start-a-saving-pla
- Chatzky, Jean (2018) https://www.nbcnews.com/better/business/how-grow-your-savings-reach-your-short-term-goals-ncna857871
- Bell, Amy (2022) https://www.investopedia.com/articles/investing/030217/best-strategy-shortterm-savings-goals.asp