What's a short-term financial goal?
When you think of investing, you most likely think of accounts used for long-term financial goals, like a 529 plan for college savings or an IRA for retirement. But investing can also benefit short-term goals for things you want to buy or do in the near future, such as the following:
- Pay down debt.
- Plan a wedding.
- Buy a car.
- Save for a down payment on a house.
- Build an emergency fund.
It might be tempting to use a credit card or borrow from other savings for those types of goals, but doing so often comes with drawbacks and can cost you money in the long run.
How long are short-term goals?
Short-term goals are usually made to be accomplished within a few months to a few years. The amount of time it takes to achieve depends on the goal, how much it will cost, and how much you're able to save toward it. That's why it's important to make a plan and determine the best way to invest for it.
How can investing help you reach your short-term financial goal?
You could just keep the cash left over after you pay your bills in your bank account or move it to a savings account. But putting that money in a separate investment account instead can have 2 major benefits:
1. Investing your money keeps you from buying something else
No matter how much you want to check a savings goal off your list, it's all too easy to spend the money on something else when it's just sitting in your bank account. Maybe you think willpower alone will be enough to keep you on course. If so, that's great! But what if it isn't?
Say you're planning a wedding. Despite knowing you'll need the money for your reception and honeymoon, if it's easily accessible, you might be tempted to use some of it to go out on the town with your partner or celebrate your engagement with friends. The best way to ensure that your money goes toward your goal is to move it out of your bank account before you feel the urge to spend it. Keeping that money in a separate account also makes it easier to see your progress.
One way to prioritize your goal is to set up automatic investments. When you do this, the money will go directly to the account you're using to save for your goal.
2. Considering your average return might help you reach your goal faster
When investing for a short-term goal, you may want to consider the average return on the investments you choose, or the profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.
See how investing can help you reach your short-term financial goal
The chart below shows that reaching a $10,000 goal would take you 3 years and 9 months if you saved $200 a month and earned 5% a year. In that time, you'd make a total investment of $9,000.
On the other hand, saving the same amount in an account with a low interest rate of 0.5% would take you 4 years and 1 month, and you'd deposit a total of $9,800.
This hypothetical illustration doesn't reflect any particular investment nor does it account for inflation. There may be other material differences between investment products that must be considered prior to investing.
By investing, you could reach your goal with less time and money
This chart shows that reaching a $10,000 goal would take you 3 years and 9 months if you saved $200 a month and earned 5% a year. In that time, you'd make total investments of $9,000.
On the other hand, if you saved the same amount but earned only 0.5%, it would take you 4 years and 1 month, and you'd deposit a total of $9,800.
This hypothetical illustration doesn't reflect any particular investment nor does it account for inflation. There may be other material differences between investment products that must be considered prior to investing.
Ready to start saving for your goal?
If you have a short-term financial goal, make a plan to get started. The sooner you start saving toward your goal, the sooner you'll achieve it! But remember—how long it will take you to reach your goal will depend on what it is, how much you need, and how much you can put toward it each month.
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All investing is subject to risk, including the possible loss of the money you invest.