A new car? Your wedding? The down payment on a home? More education?
Most financial advice tells you to save for two –- maybe three — things: A rainy day (the cash you stash away in your emergency fund), retirement and, once you have kids, their college education.
But what about everything else? Are we just supposed to go into debt to pay for all that stuff?
Why you don’t hear about investing for short-term goals
Actually, I suspect that’s why we don’t see more written about saving for these short-term goals…most people don’t save for them: They finance the new car. They put their wedding on credit cards. They get a bigger mortgage rather than put money down. They get student loans.
But you’re not like most people. You know you’re going to need big money to get married or buy a home in several years, and you want to start planning for that. One problem: Bank savings interest rates suck and stocks can seem risky.
What you can do to save money you’ll need in 10 years or less
The solution for short-term savings is a properly allocated investment portfolio that holds bonds and stocks. You need stocks because bonds likely won’t deliver the kinds of returns you want; you need bonds because the an all-stock portfolio increases your risk of being stuck with a negative return when you need to withdraw the money.
Personally, my wife and I have a savings account with a six-month emergency fund in cash and a non-retirement brokerage account with a mix of index funds: 60 percent stocks and 40 percent bonds. (Our retirement accounts are more aggressively allocated with about 80 percent stocks.) At the moment we’re not saving for anything in particular aside from retirement and our children’s education, but we might adjust that allocation if we need to hit a certain amount of money at a certain time.
Short-term investing with Betterment
I also have an account with Betterment (affiliate – see footnote), an alternative to brokerages that simplifies your investing decisions by giving you just one choice: What percentage to invest in stocks and what percentage to invest in bonds. Betterment then invests your account in low-cost index funds that track the entire stock and bond markets and continually readjusts your holdings to maintain your desired allocation.
For short-term investing, Betterment offers one notable feature: The ability to segregate your savings by goal. Each goal is a bucket of money that you can assign a unique allocation. For example, you could have one goal in which you invest aggressively for a business you might start in 20 years and another goal for your wedding in two years in which you choose a more conservative, bond-heavy allocation.
Short-term investing with mutual funds
If a self-selected mix of index funds is the advanced way and Betterment is the easy way, there’s an intermediate option: Mutual funds designed specifically for short- or mid-term investing goals.
These funds will be managed to preserve your capital while hopefully providing decent returns for your desired time frame. Vanguard’s Life Strategy fund family includes examples.
Of course, you can always leave your short-term savings as cash in savings accounts or certificates of deposit, but at less than 2 percent interest and with inflation as a constant concern, doing so is just barely better than leaving the cash under your mattresses.
What about you? How do you save or invest for short- or mid-term investing goals in the next 10 years or less?
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