Big Purchase on the Horizon? Think Short-Term Investment Strategies

There are some important things to keep in mind when deciding how to invest for shorter term goals. Expense? Keep Savings Short-Term
5 min read
Photo by Getty Images

Key Takeaways

  • Understand the difference between long-term and short-term investing strategies    

  • For short-term investing, establish a timeline for your priorities 
  • It may be best to avoid forsaking your long-term retirement plan for your short-term financial goals

Whether you’re a young investor starting out, or a more seasoned investor saving for the kids’ college or your own retirement, it’s important to understand how investing for short-term goals (those within the next one to five years) is different from planning for the long term.

Although most investors share the long-term goal of retirement, shorter-term goals often vary. Near-term goals might be saving for a wedding, a big vacation, a home down payment, or a kitchen remodel. And anyone who recently welcomed a new baby to the family probably knows planning for hospital costs, infant furniture and a host of other needs is an important short term savings goal. 

None of these short-term aspirations means taking an eye off of retirement. They require a different type of strategy and approach. For instance, a 401(k) may be a great option for retirement, but it’s likely not appropriate for money you’re saving for a down payment on a home.

So the question is, how to optimize investing for short-term goals without impacting long-term plans? And what are some investment choices for money that’s directed toward those big plans just over the horizon?


Establishing the timing for your short-term goals would likely be the first priority. They’ll have different time frames than long-term savings goals. Someone might plan a big vacation a year in advance or save for a down payment on a home with a three-to-five-year time frame. However, a long-term savings goal, like planning for retirement with a 401(k) or IRA, is more realistically a 30- to 40-year journey.

Next, it’s time to decide on a savings or investing vehicle for your short-term goal. It basically boils down to your choices: more aggressive investments with higher potential returns and risk, such as stocks or high-yield bonds; or more conservative choices with lower risk and returns, such as high-quality corporate bonds, money market and savings accounts, CDs, U.S. Treasury bills, or conservative ETFs.

The Pros and Cons of Investing and Savings Choices 

Both high- and low-return vehicles have distinct advantages and disadvantages. At the top of the list is risk. The more aggressive a vehicle is, the more exposure it has to risk, which means it’s more likely to experience peaks and dips in value. More conservative choices can be much more likely to preserve capital, but conversely, present less opportunity for growth. It’s always important to understand the balance of return and risk when considering an investment.

You may choose to keep your short-term savings in money market accounts, CDs, and other common saving products. Or, you may choose to look at vehicles that offer a balance of risk with more growth potential. A conservative portfolio allocation with a stock component can potentially produce a greater return than a low-risk bond portfolio, although at a greater risk.

Each vehicle has its own set of advantages and disadvantages:




Money market funds
Securities that invest in short-term, high-quality commercial paper, repurchase agreements, and Treasuries.
  • Highly liquid
  • Often low minimum balance requirements
  • Low yield, currently about 1-2%*
  • Might not be FDIC-insured
Certificates of Deposit (CDs)
Savings certificates with a fixed maturity date and usually a fixed interest rate. 

  • Might offer higher yield than money market
  • FDIC-insured up to $250,000 per account
  • Low yield, currently about 2-3% on CDs maturing in 1 year or less*
  • Penalty for early withdrawal
U.S. Treasury bills/bonds
A debt obligation backed by the U.S. government, who borrows the funds for a defined period of time at a variable or fixed rate.

Learn more about bonds and other fixed-income securities
  • Among the safest other than cash
  • Value fluctuates before maturity
  • Low yield, currently 2.5% for 1 year; 3.5% for 5 years*
Corporate bonds
Debt issued by corporations and sold to investors. The company backs the bond with money earned from future operations.

Learn more about bond issuance, income, and risks
  • Often higher yields than government bonds
  • Greater risk
Equity ownership of publicly traded companies.

  • The highest, and most unpredictable, returns
  • Greatest risk
*Data current as of November 2018. Data source: TD Ameritrade, Bonds & CDs Overview

How to Save, Plan, and Invest in the First Place

Although knowing where to put savings is a critical first step, you might be wondering how to allocate savings in the first place beyond what you’re already putting away for retirement. Financial experts say it’s important to take the following steps:

Saving for a Short-Term Major Expense

1. Have a plan. Whether the goal is a down payment, a wedding, or a vacation, write it down and make sure you understand all the expenses involved.

You can even adjust the details and time horizons of your plans to match your financial situation, said Dara Luber, senior manager, retirement, TD Ameritrade.

“If you’re going on vacation with $1,000 to spend, maybe it’s a car trip 200 miles away, not a Queen Elizabeth II voyage to Europe. Stay realistic,” Luber said. “And if you do want to take the QE II to Europe, you still can, but maybe it’s not in two years, it’s in five. You don’t have to give up a goal completely.”

Investors should create a plan, whether it’s an electronic spreadsheet or an old-fashioned pen on paper, said Robert Siuty, senior financial consultant, TD Ameritrade. Investors who plan their budgeting have a much better chance of sticking to it.

2. Break it down. Once you know your time horizon and understand what you’re paying for, start paying yourself. That’s right: Set up regular payments and remember to chip in a “bonus” payment when possible. For a wedding or vacation that’s a year away, perhaps it means forgoing certain expenses in the near term, such as meals out, and contributing that money instead to the event you’re planning.

“If saving for a vacation makes you happy, put it in your budget and cut down on dining out,” Luber said.

For a goal like a down payment on a home that’s three to five years away, make a point of using milestones such as pay raises to your advantage. A 3% pay raise, for instance, could all be funneled into that short-term goal without eating into retirement or college savings, and without forcing you to make lifestyle changes.

3. Set up auto deposit. The best way to save for short- and long-term goals is to set up automatic deposits from your paycheck or through your bank or brokerage. Doing so will help ensure that you stay true to your goals as well as reduce the urge to spend money on less important things. 

Just about everyone needs to plan for long-term retirement savings, but short-term goals vary and deserve their own financial plans. Consider your short-term investment choices carefully as you put your plan into action. Then check the progress of your savings to stay motivated toward pursuing your goal. 


Key Takeaways

  • Understand the difference between long-term and short-term investing strategies    

  • For short-term investing, establish a timeline for your priorities 
  • It may be best to avoid forsaking your long-term retirement plan for your short-term financial goals

Related Videos

Call Us

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Money market funds, like mutual funds, are neither FDIC-insured nor guaranteed by the U.S. government or government agency and are not deposits or obligations of, or guaranteed by, any bank. There can be no assurance that these funds will be able to maintain a stable net asset value of $1 per share. It is possible to lose money by investing in Money Market Funds. Tax exempt funds may pay dividends that are subject to the alternative minimum tax and also may pay taxable dividends due to investments in taxable obligations

All investments involve risk, including loss of principal.

Investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. May be worth less than the original cost upon redemption.


Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2021 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top