How to Invest for Short-Term Goals within the Next 10 Years
One of the most important deciding factors behind any financial strategy is time. You may think that inflation, economies, and markets affect your financial goals, but it is time that steers all of these factors and ultimately your financial plans. People like to keep different time- based goals that they hope to achieve in their life. For example, first international travel by 25, first car at 30, first home by 40, etc. You need specific plans to achieve these time-based goals. In this article, we cover the various investment options that you can consider if you are saving for goals that you hope to achieve within the next 10 years or less.
Jot down all your short-term goals
The first step to follow when investing for your short-term goals is to make a list. Categorize your goals as recurring and non-recurring.
- Recurring: These include your regular expenses like insurance premiums, car loan payments, home rent, groceries, etc.
- Non- recurring: This includes expenses like buying a new car or a new home, travel, etc.
This activity will give you an idea of how much time you have to save up for each of these goals. It will also give you an idea of the level of liquidity that you are required to maintain for some of these goals (insurance, rent, etc.)
Now that you know how much time each of your goals requires, you can choose between the following options to invest:
1. Savings account
Savings account is a type of investment because you earn interest for your money from your bank. Although the returns are not very high, these accounts are entirely risk- free. The only thing that can cause a threat to your money is inflation and the unlikelihood of bank closure. Savings accounts are great to cover routine expenses like insurance premiums, rent, utility bills, etc. Look for a bank that offers the highest rate of interest, requires no minimum balance, and charges zero maintenance fees.
2. Short-term time deposit account
These accounts offer short term lock- in periods for your money like 90 days or 6 months. Most banks provide short- term time deposit accounts at higher interest rates than a savings account. The risk factor is also as negligible. These accounts work the best for goals that you wish to achieve in 3 years or less.
3. Money market account
This is similar to a certificate of deposit or CD. But unlike a CD, money market accounts come with immediate access to funds. The return of interest is high and with no potential risk. Just like a bank account, you can access your funds anytime with an ATM card, deposit slip, or a check.
4. Certificate of deposit or CD
A CD offers a high rate of interest on your money. This is a good option if you have a fixed amount of time in mind. You can choose the time for your CD to mature and claim the entire amount with added interest at the end of the period. Or you can choose to receive monthly interest payments. But withdrawing a CD before its maturity date can result in hefty penalties. Usually, a penalty is the equivalent of 3 months worth of interest on the CD. This option is great for non- recurring goals like buying a car, or a specific time or reason for travel (anniversary or birthday).
5. Checking account
A checking account, specifically an online checking account, is a very convenient and secure investment option. Although the rate of interest is extremely low, the account is safe and offers unlimited withdrawals and excellent liquidity without any penalties. This is a good option for meeting day to day expenses, as well as emergencies.
6. Roth IRA
You must be surprised to see this option on the list. But surprisingly, Roth IRAs are not just good for retirement but are also a great short- term investing tool. Roth accounts offer tax- benefits and allow you to withdraw your contributions (not earnings) whenever you want. Roth IRA not only offers a high rate of interest but also provides access to mutual funds, exchange- traded funds (ETFs), and other bonds. These accounts are a good choice of investment. Even if you have a change of plans and don’t withdraw funds for short- term goals, you can still earn the long- term benefits of a retirement account.
7. Government bonds
Treasury Inflation Protected Securities or TIPS is another short- term investment tool. It works a bit differently than other options on the list. The rate of interest of TIPS remains the same, but the value of the bond rises with inflation. For example, while the interest may be 1% per annum, the value of the bond can increase by 3% depending on the rate of inflation in a particular year.
8. Exchange- traded funds
ETFs and other short term bond funds are not as stable and risk free as money markets but they do offer higher returns. You can trade these bonds using a brokerage account, but it is advisable to consult a financial advisor before putting your money in. If you have an appetite for risk and are willing to take a chance, short- term bonds can be a great way to earn a high yield that can be used to cover big expenses like the down payment for a house or a car.
While these are the most common types of investment methods for short- term financial goals, there are many other things that you can do to increase your avenues of earnings. In the age of virtual money and cashback, it is good to keep a tab on sales and promotions that different online vendors and credit card companies have to offer. A lot of people are able to cover many of their short- term expenses like grocery shopping, gas, etc., with online deals and cashback rewards. These schemes are not just limited to small expenses, but can also be traded for costlier things like using frequent flyer rewards for travel.
To sum it up
It is essential to plan for both short- term goals and long- term goals in advance. Many people do not include their short- term goals in their financial plans, thinking that they can pay for it as and when they surface. But they don’t realize that poor planning ultimately leads to increased debt. Short- term financial planning is easy and a great way to grow your money regardless of whether you spend your money on these goals or not.
The focus should be on reducing the need to use credits cards and loans and pre-planning for any kind of expense- big or small.
Do you have an impending short-term expense? Reach out to financial advisors for advice on the best investment method for your future goals.