How to Invest for Short-term Goals

When you’re preparing financially to achieve a short-term goal, you’re looking for somewhere safe to put your money. Unlike saving for retirement, saving for short-term goals should give you the ability to access that money rapidly so you can buy a home, renovate your kitchen or take your dream vacation. 

Investing for short-term goals gives the benefit of liquidity while also ensuring that your money is working for you. You not only want something that’s secure, but also something that’s easy to access and ideally will help you reach your goal.

What’s the best way to save or invest for short-term financial goals? Here are some tips to consider and the information you need to make a smart financial decision.

What Are Short-Term Financial Goals?

There’s no one definition of short-term goals. Maybe you want to take a vacation later this year, or maybe you want to buy a house in a few years. (That’s where saving for a down payment might come in.) You can generally think of them as any big purchase that you will need  liquidity for within the next five years.

The first thing you should do when starting to plan for a short-term goal is evaluate how much you need, your timeline and your risk tolerance. Because longer-term investment timelines have a more solid rate of return, investing on a shorter investment horizon means giving up potential earnings in the stock market for the safety and security of something less risky. 

This is difficult in low-interest rate environments, but you don’t have the advantage of time on your side if the market dips. This typically means that any shorter-term investment types you might use will be less risky and have a lower rate of return than your longer-term savings (such as your retirement accounts). 

There are a few things you should consider and steps you should take as you plan a short-term investment. Here’s what to remember. 

Tips for Short-Term Investments

Take care of high-interest debt first. Before you look into any other investing opportunities, pay down your high-interest debt (like your credit cards). You can save a hefty chunk of change when you’re no longer paying so much in interest.

Pay yourself first. It’s easy for money to be divided up for different areas of your budget quickly. That’s why you should put money in savings before you do anything else. Make saving money a priority.

Look for stable investments. With long-term investments, you have the advantage of waiting for the market to move; with short-term goals, that’s not an option. Any significant change directly impacts your ability to reach your goals — and while that’s great if the market goes up, you really can’t afford the risk. So be sure that the investments you choose are as stable as possible.

Compare interest rates. Typically, short-term investing options have lower interest rates — that’s the tradeoff for stability — but you can still find the options that offer the best rates. Shop around before you commit and talk to your financial advisor.

Ensure that the liquidity of your investment aligns with your timetable. Some investment options require you to leave your money set for a certain amount of time, or they limit the number of times you can withdraw from the account in a month. Do your research so you know your investment of choice is a fit for what you need.

Search for an option with low transaction costs. When you’re preparing to invest for a short period of time, you know you’ll be moving the money relatively soon. Don’t settle for something that has high fees or transaction costs — that can take a significant bit out of your savings.

Best Ways to Invest For Short-Term Goals by Timeframe

There are many ways to invest on a shorter timeline. Deciding the best way to invest your money short-term depends on the timeline of your individual goals. Here are short-term investment options that  may work best for your timeframe.

Best Saving Options for Goals Under Two Years

A savings account is a safe, low-risk way to save money, but also one with a generally low rate of return. A high-yield savings account  may provide a better interest rate, but in general savings accounts don’t yield a lot of interest. However, they are typically highly liquid so you can access your cash whenever you need. Savings accounts are also FDIC-insured, up to the applicable limits, so you can have peace of mind knowing that your money is safe in the event of a bank failure.

A money market account is similar to a savings account, but it typically requires a larger initial investment and may have a higher interest rate. Like a savings account, money market accounts are FDIC-insured, up to the applicable limits. These also typically include restrictions on withdrawals, so make sure you know the terms before you open an account.

A money market mutual fund includes short-term debt from the U.S. government, municipality governments or corporations. They are considered safe but yield little interest.

A cash management account is similar to a money market account but is typically offered by a non-banking financial institution such as a brokerage firm

An ultra-short-term bond fund invests in bonds with very short-term maturities. Like other short-term investments, they are relatively safe and typically have lower potential for returns. However, since they are not FDIC-insured, they are slightly riskier (and therefore may offer higher yields) when compared to money market options.

Where to Invest for Two to Three Years

A short-term corporate bond fund is a type of mutual fund that invests in bonds issued by corporations so they can raise cash. Because the fund is diversifying among multiple companies, it reduces individual risk. These funds are also  generally liquid,  as you can buy or sell shares on any business day.

A short-term U.S. government bond fund is similar to a corporate bond. However, it may be safer because it is backed by the federal government. That safety comes with a price: they typically have lower interest rates. You can also purchase specific securities with relatively short maturation ranges in the form of treasury bills (T-bills) or treasury notes (T-notes).

Saving or Investing for Goals Three to Five Years Out

A certificate of deposit (CD) is a bank product that offers a fixed interest rate in exchange for agreeing to keep your money for a set period of time. Generally, CDs are safe investment which can fit any timeline — even under two years — but agreeing to a longer time period where your money is inaccessible will likely get you a higher rate of return. Beware — if you try to withdraw the money early, you will be subject to a penalty. 

Be Ready for Your Future

You have many choices as you work toward your short-term goals. Before you make any decisions, talk with Farm Bureau about the option that will work best for you. Not only can we help you reach your goals, we can also create a customized plan so you can move forward with confidence knowing you are working toward your aspirations.