MoneyUnder30.com
MoneyUnder30.com

Q&A: Should I Invest Money I Need in Two Years?


Q: I just started my first full-time job (this Monday!) and found your blog doing a search trying to make sense of my 401(k) options. I have been so inspired reading all over your blog since then and learning more about investing and saving for retirement.

I have a specific question about one of my savings goals. I want to have $18,000 saved within two years to pay for an accelerated nursing degree program. I’m $3,500 in so far and planning to contribute a lot in the next few months while I’m still living rent free. After that, I can hopefully save $500 a month. I currently have this money in an ING savings account at 0.75 percent interest but I’ve been inspired to consider investing it. The problem is my goal time frame is right around the cusp between the short- and mid-term time periods, so I’m not sure which advice to take. This would be my first investing experience and I’m afraid to risk it on a goal that is so important to me. I’ve been considering Betterment but I would be very grateful to hear from you first. –Grace

A: Contrats on the new job and your plan to save for your advanced degree. A lot of people don’t think twice about borrowing “whatever it takes” to go to graduate school. Depending on the degree in question, those student loans may or may not be worth it in the long run, but either way they will set you back financially for a number of years. If you can stick with your plan to save a large chunk of your tuition you’ll be that much better prepared to make your future earnings work for you when you graduate.

Now, about whether to save or invest.

As you recognize, putting your money in anything but an FDIC-insured savings account always involves risk. So you have to ask yourself if the risk of losing some of your money is worth the extra return you could get by investing it. Let’s look at the numbers:

  • If you start now with $3,500 and put in $500 a month in the ING account at 0.75 percent, you’ll have about $15,640 in two years.
  • If you invested in mostly bonds and some stocks to hope for a return of 4 percent, you’d have about $16,200 in two years. Of course, a 4 percent return is optimistic — you might get closer to 2 percent, and there’s always the chance your investments could be flat, or even down, at the end of the period.

There’s one final consideration: Taxes. Savings interest is taxed at your marginal income tax rate. Any gains on investments you hold longer than one year as well as qualified dividends, are taxed at the lower capital gains rate. Regular dividends and investments you hold for less than one year are taxed at your income rate, as well. The bottom line is there is room to save a bit on your taxes by investing rather than saving.

So, if you’re going to invest the money, where should you?

You mentioned Betterment, which is a simple way to invest. I would pick an allocation that’s 70 percent bonds and 30 percent stocks. The platform makes it easy to set up monthly auto-deposits and adjust this allocation if you ever need to.

Another option is to open a direct mutual fund designed for a short-time horizon. By investing directly with the fund company you should be able to set up automatic deposits. One such fund is the Vanguard LifeStrategy Income Fund. There’s a $3,000 minimum to open this fund, but it sounds like you have that covered.

Whether to save or invest all comes down to your risk tolerance: By investing in a diversified account like the ones above, you protect yourself as best you can, but there’s always the chance that your account will be flat or even down when it comes time to go to school. If that’s too scary, stick with a good-old ordinary savings account.

As one final alternative, if you dont’ mind a little extra paperwork to earn a few extra dollars, you could take the $3,500 you have now and open a two year certificate of deposit (CD).

Continue to add to your savings account each month for another year, and then open another one year CD with that money you’ve saved. I typically don’t recommend CDs to young savers, and the reason is simple: if you ever need the money you put into the CD for something else, you can’t withdraw it without paying a penalty. With the difference in rates between regular savings accounts and CDs so thin, this is a big downside for a little bit of gain. Your situation, however, a defined two-year savings timeframe, is a worthwhile exception to this rule.

What do you think? Would you invest for a goal that’s just two years away? How do you maximize your returns for short-term savings goals?

Get access to our best money hacks:

Join over 11,000 other young professionals and learn how to get out of debt by 30, increase your income this year and invest for financial freedom.




100% free! I will NOT spam you and I will NOT share your email.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I like to look at these types of comparisons relative to the monthly savings. By your (optimistic) calculations, Grace could earn about one month of savings more by taking on the risk of investing. Personally, that’s not enough benefit for the risk (there’s no risk in the savings account situation), but I’m pretty risk-averse with my money.

  2. I think the risk outweighs the reward. I would keep the money in savings and think of other ways to invest any leftover cash each month.

  3. There’s no way I would put this money in stocks or in any bond fund with a duration longer than 2 years. As other commenters have pointed out, the benefit of putting the money at risk is likely to be very small, while the downside is huge. With such a short time frame, the savings rate has a MUCH bigger impact than the return, so the interest she’s earning is almost irrelevant. Keep it in the ING account and focus on saving as much as you can.

  4. I definitely wouldn’t invest in this case. As the many commenters have already pointed out, the risks are really too great for a two year time period.

    Although, I would say to looking into government savings bonds. Even with a lost interest period, she could be earning between 1.5 and 2 percent and avoid paying any taxes since interest would go to qualified education spending. Doubling your interest and avoiding taxes at the same time is worth looking into.

  5. I would stick the money in an Ally savings account (currently .95%), or if you want you could go for I bonds or some other treasury bill. But really, 2 years is so short it doesn’t really matter.

    If you were talking about five years I would do some investing, but not for 2 years.

  6. I thought through almost the same question (for a different goal – a house and furnishings) and while I have a very good amount for a down payment and initial costs, I wanted to earn more than my ING account.

    I opened a brokerage account with Vanguard and you can purchase commission free ETFs. I am doing 70% in the total bond market etf and the rest in the the total stock market and international stock etfs. Hopefully, it will be low risk and at least a 4% return.

  7. I would say bonds or a bond fund. Such a short time period and the risk is too great fir obly a potential $1,000 of additional cash, unless you absolutely need that additional money for tuition, which it sounds like you don’t.

    Loved this article though, well thought out advice.

  8. I’ve been reading about Betterment in a number of posts and getting excited to open an account. Then I learned that I can’t because I’m not a resident of the US. I’m a Canadian citizen, but not a resident, and work in international development so I move around a lot (currently Solomon Islands, last year South Sudan). Any suggestions of similar online investing platforms that are as simple to use as Betterment but that I can actually access?