As we enter into the heart of the summer, the topic of conversation usually turns to summer vacation plans. Pursuing short-term financial goals--those that you'd like to achieve within one to five years, such as a down payment on a home or car, or a family vacation--can require a different strategy than pursuing long-term goals. Here are some steps to help you save and invest when you're going to need your money sooner rather than later.
- Step One: Be specific about your goal. Setting a specific short-term goal will help you evaluate your progress toward meeting it. For instance, the vague objective "I want to save money to buy a house" becomes "I want to save $25,000 over five years to put toward the down payment of a house in (town/city)."
- Step Two: Take steps to free up extra cash. How will you save the money that you need? Eating out less often, canceling a gym membership that you don't use, or downgrading your cable from a premium to a basic plan could easily free up $100 per month or more toward your goal. There are probably many areas where you can save a few bucks. Make a detailed list of what you spend in an average month and see where you could afford to trim.
- Step Three: Match your investments or savings vehicles with your goal. Safety and liquidity will be priorities if you need the money within a few years. Stocks can experience extreme fluctuations over short-term periods. You don't want to be forced to sell your assets when the value of your investments has dropped. More appropriate choices for short-term needs may be the conservative instruments that offer a more stable return, such as short-term bond funds and money market funds. Federally insured savings vehicles, such as certificates of deposit, could also play a role.
Understanding Short-Term Investments
Short-term bond funds primarily invest in U.S. government or corporate debt with maturities that range from one to three years. Money market funds pool investors' dollars to buy money market instruments. These types of securities aim to produce current income, offer liquidity (how quickly you can sell an asset) and usually aren't subject to the dramatic ups and downs of stocks. Certificates of deposit are interest-bearing debt instruments with a wide range of maturities. In exchange for purchasing a certificate of deposit, the investor will receive the return of principal plus interest at the maturity date.
Finally, remember that short-term objectives should not take way from investing for long-term goals.
Craig Bernard, CFP, ChFC, CLU
Madison Investment Center
206 Boston Post Rd
Madison, CT 06443
P:(203) 245-3131
www.madisoninvest.com
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