Got Only Long-Term Investments on the Brain? Hold up. Here's Why You Should Plan for Short-Term Investments as Well
If you're a planner, you may worry more about your long-term investments than your short-term investments. Here's why you need to consider short-term investments, too.
It's easy to get into the habit of only thinking about long-term investing strategies. After all, how many articles have you read about the importance of saving for retirement? Your company puts on retirement seminars, your financial advisor starts conversations with, "Let's take a look at your retirement savings snapshot."
You panic at the thought that you're "behind" on retirement savings because of articles like "Have you Saved this Much Retirement Money by Age 40?"
You may get so knee-deep into thinking about your long-term strategy that you neglect what's right on the horizon, and that means choosing short-term investing strategies.
What short-term investments might appeal to you? Let's walk through a few short-term investing ideas and some solid short-term investment vehicles as well.
Short-Term Goals You Might Want to Consider
Does the following list show everything you might possibly want to save for in a few months or a few years? Of course not. That's why personal finance is so individualistic — you can choose your own goals and strategies. However, let's take a look at a few savings goals you might want to consider.
Start an Emergency Fund
Everyone needs an emergency fund. This one isn't so much as a goal you "might" want to consider; it's one of the most important short-term goals you can identify.
Experts recommend stashing away at least three months' worth of emergency fund money, and if you have a job that's a little more unstable, such as a consultant or freelancing job, you should save even more. You may want to ramp your savings up to six or even 12 months' worth of saved income.
Paying off debt can help you reduce the amount of interest you pay on your debts over time. You may want to take this approach if you have high-interest credit card debt. Paying off debt will not only free up your conscience, it can also improve your credit score.
Now, this really doesn't qualify as a short-term investment because the money won't go directly into a short-term investment account. Instead, you'll apply your cash directly toward paying off your debt. However, it's worth mentioning because many experts suggest eliminating debt before you attempt to invest in short- or long-term goals.
Create Travel Goals
Have a plan to make it to all 50 states and all the countries in Europe? If so, you may have to develop a specific plan to make it happen. Saving for travel doesn't always land on everyone's to-do list, but if it's on yours, you may want to put together a very specific savings plan to make sure you realize this type of short-term goal.
Plan for a Wedding
Will you plan a wedding for yourself or your child sometime soon? A wedding definitely goes into the short-term planning category. The approximate average for receptions in 2021 costs roughly $22,500. The 2020 national average cost of a wedding was $19,000, a drop from 2019's average of $28,000, according to The Knot.
Make Home Improvements
Take your pick of home improvements — putting in a pool, a new kitchen, finishing your basement and more. You can make the case that all of these represent short-term savings options. Chances are, you want to complete them within a few years, so you want to put your money in the right type of fund in order to save up.
Short-Term Savings Vehicle Options
Once you identify the goal you want to achieve, write down the time horizon for that goal and the amount of money you'd like to save to meet your goal. Then, take a look at the following types of short-term savings vehicles on our list.
Short-term investment vehicles offer lower risk compared to other types of investments, especially compared to stocks:
- CDs: Certificates of deposit (CDs), offered by banks and credit unions, provide an interest rate premium as long as you hold onto the CD for a specified period of time. They generally offer a higher interest rate than regular savings accounts. Here's how a CD might work: Let's say you invest $1,000 in a five-year CD. You must keep the money in the CD until it reaches its maturity date, in exchange for, say, a 3% return. If you take the money out earlier, you will have to pay a penalty.
- Money market accounts: Money market accounts are interest-bearing accounts that often offer debit cards and check-writing privileges. You can open a money market account at a bank or credit union.
- High-yield savings accounts: Similar to money market accounts, high-yield savings accounts also typically offer a higher interest rate than regular savings accounts. The major difference between money market and high-yield savings accounts is that money market accounts (MMAs) allow you to write checks and high-yield savings accounts do not.
- Government bonds: Put simply, you lend money to a government entity when you buy government bonds. A government bond refers to a debt security issued by a government to support government spending and obligations.
- Treasury bills: Treasury bills allow you to lend money through U.S. short-term debt obligations. They are short-term government securities with maturities ranging from a few days to a year. They're different from Treasury notes, which mature in two to 10 years. Treasury bonds, on the other hand, mature between 10 to 30 years from their issue date. Your time horizon can dictate which type of Treasuries you choose.
Get the Right Short-Term Investments
These types of investments may not get you as excited as investing in an up-and-coming company. However, your goal with short-term investments differs from long-term investing because it's all about preserving capital. You don't want to expose your money to a lot of volatility, especially when you'll need the cash in just a few years.
Carefully consider how much liquidity you prefer as well. For example, a CD doesn't offer as much liquidity as, say, the money you can get out of a money market account, which you can withdraw at any time.
It might seem tricky to identify the right combination of investments, especially when you save for both long-term and short-term goals. However, once you figure out the options that are right for you, you can hit the ground running.