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, you want to be able to access that money in a short time so you can buy a home, renovate your kitchen or take your dream vacation. A short-term investment provides 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 Is a Short-term Goal?

There are a variety of definitions of “short-term” goals, but you can generally think of them as anything that you will need liquid cash for within the next five years, roughly.

The first thing you should do is evaluate how much you need, your timeline and your risk tolerance. When you have a shorter investment horizon, you give 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 your shorter-term investment vehicles will be less risky and have a lower rate of return than your longer-term savings (such as your retirement accounts).

6 Tips for Short-term Investments

1. Take care of high-interest debt: Before you look into any other investing vehicles, 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.
2. Pay yourself first: It’s easy for money to be apportioned to different areas of your budget quickly. That’s why you should put money in savings before you do anything else. Make saving a priority.
3. Look for stable investments: Unlike long-term investments, you don’t have the advantage of waiting for the market to move when you’re investing for short-term goals. 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.
4. 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.
5. Ensure 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 limit the number of times you can withdraw from the account in a month. Do your research so you know your vehicle of choice is a fit for what you need.
6. 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 bite out of your savings.

Best Short-term Investments by Timeframe

There are many vehicles for short-term investing. Deciding the best way to invest your money short term depends on the timeline of your individual goals. Here, we outline the short-term investment options that will work best for your timeframe.

Best for Less Than 2 Years

• A Savings Account is a very safe, low-risk way to save your money. A high-yield savings account will have a better interest rate, but in general savings accounts don’t yield a lot of interest. These are typically highly liquid so you can access your cash whenever you need. Savings accounts are FDIC-insured, 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 one that typically requires a larger initial investment and may have a higher interest rate. Like a savings account, money market accounts are FDIC-insured. These also typically include restrictions on withdrawals.
• A Money Market Mutual Fund is an investment that includes short-term debt from the U.S. government, municipality governments, or corporations. They are considered very safe but yield little interest.
• A Cash Management Account is similar to a money market account but is good if you already have an account with a brokerage firm because a cash management account keeps all your investments in one place
• An Utra Short Term Bond Fund invests in bonds with very short-term maturities. Like other very short-term investments, they are relatively safe and have lower potential for returns. However, they are not FDIC-insured so are slightly more risky (and therefore may offer higher yields) when compared to money market options.

Best for 2 to 3 Years

• A Short-term Corporate Bond Fund is essentially a mutual fund that provides loans to corporations so they can raise cash. Because you are spreading risk amongst multiple companies, bond funds are relatively safe. These are also fairly liquid, because if you don’t want to wait until the maturity date you can sell your investments on the market.
• A Short-term U.S. Government Bond Fund is very similar to a corporate bond but is incredibly safe 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).

Best for 3 to 5 Years

• A Certificate of Deposit (CD) is a bank product that offers a high interest rate in exchange for agreeing to keep your money in the fund for a set period of time. Generally, CDs are safe investments with high returns. CDs 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 fine.
  

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