Saving and Investing for Short-Term Goals

By: Gregory J. Cook, EA, CPA  Author

 

While many investors have established an investment plan for their long-term financial goals, fewer have focused on the need for a savings and investment plan for their short-term goals. Some important decisions to make regarding your short-term financial goals include how you will reach the goal, how you will invest to meet the goal and when you will need assets to meet your goal.

 

Time Horizon

You have a variety of investment choices when saving for short-term financial goals. Be it a new house, a vacation or a car, if you know you would like money available in a few years, you will want to approach this goal with a short-term investment plan.

 

Your investment strategy for short-term goals will likely have as its main goal a high degree of certainty that the money will be available when you need it. For that reason, you will probably want to find investment options that offer a high level of liquidity and a low level of volatility. Liquid investments can be converted to cash very easily at little or no cost. Investments that have a low level of volatility do not rise or fall in value in large movements. In return for knowing your investment will probably not lose much value, you give up the potential for large returns.

 

Investment Considerations

Cash and cash equivalents are common choices for investing toward short-term goals or saving for an emergency fund. The most popular types of cash equivalents include Treasury bills (T-bills), certificates of deposit (CDs), money market accounts and money market funds.

 

T-bills are like short-term loans to the government. They are sold at a discount to face value ($1,000). The difference between the purchase price and face value is the interest you earn at maturity. If you need your money before maturity, you can sell T-bills prior to maturity, but you will get the current market price, rather than face value. Market price may be less than your original investment. T-bills are available in 4-, 13- and 26- week maturities. These investments are considered one of the safest because they are backed by the federal government’s ability to pay.

 

CDs are  offered  in maturities ranging from 3 months to 5 years. There is usually a minimum deposit, frequently $1,000. Generally, the longer the maturity and the larger the value, the higher your interest rate will be. Like T-Bills, CDs can be sold prior to maturity, but you will receive the current market price, rather than the value of the CD plus earned interest. Market price may be less than your original investment. CDs are considered one of the safest investments because the principal is insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor.

 

There are generally two types of money market investments: money market funds and money market accounts. Both investments offer interest and check-writing privileges. Generally each investment option requires that you maintain a minimum balance in order to avoid paying fees. Money market accounts are available through banks and may offer FDIC insurance for up to $100,000 per depositor, including principal and interest. Money market funds are available through mutual fund companies and brokers. These investments are not FDIC insured, but some may offer private insurance.

 

Short-term savings strategies are an important part of your total financial plan. If you fail to have ready access to assets when you need them, you may be forced to sell off investments intended for a long-term goal, which may alter your ability to achieve your long-term goal. When establishing a short-term investment strategy, always consult a qualified financial professional who can help you develop a strategy that is right for you.

 

 

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