Big Purchase Ahead? Think of Potential Short-Term Investment Strategies

Investing for short-term goals (within the next one to five years) is very different from planning for the long term, such as saving for retirement.

However, giving the same investment attention to shorter-term financial goals can help prevent you from tapping other resources key to meeting those longer-term investment targets.

Common short-term investment goals may vary but could include saving for a big purchase, such as a wedding, vacation, home down payment, or kitchen remodel. And anyone who recently welcomed a new baby to the family probably knows that 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 mean taking an eye off retirement. They require a different type of strategy and approach. For instance, a 401(k) may be a great savings vehicle for retirement, but it’s likely not appropriate for a down payment on a home.

So, how do you 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 expenses just over the horizon?

Prioritize your financial goals

Establishing the timing for your short-term goals would likely be the first priority. Different investors likely have different time frames for their 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 exchange-traded funds.

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 may be more likely to preserve capital but conversely offer 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 savings products. One risk with these is that nearly all of them currently offer net-negative yields, after accounting for today’s elevated rates of inflation. 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.

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 said it’s important to take the following steps.

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.

For example, if you’re going on vacation with $1,000 to spend, stay realistic. And if you do want to hike in Denali, 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, because those 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 instead contributing that money 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. Keep in mind, there’s nothing wrong with treating yourself now and then. But consider making these treats more special by reducing dining out habits if you have a short-term savings goal in mind.

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 automatic deposits. 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. 

Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.