Save or Invest for Short Term Goals?

I got an email the other day from a reader (I kid you not, I didn’t edit this email to make myself feel good– though by the glowing email, it almost sounds like I did! ).  I really really heart fan mail- ’nuff said. :)

I would like to start off by thanking you! Your blog is one of the best things that has graced my inbox EVER! Before you, I was drowning in all of the financial lingo, with no clear place to start on my ‘investment journey’.  I finally have a starting point for myself with the confidence to know I have the ability to navigate the world of investing.
Anyway, the reason I’m writing is because I have a question about short term goals.  Everything I read says you should be in for the long haul, which I will be.  But in the mean-time, I have a goal  with my partner in about one year.  So, here’s the run down. We have a townhouse in construction, which is payed for in full, however we want to save for upgrades in the mean time.  We have a high interest TFSA with ING, but I can’t help but feel that I should be doing more with my money.  Do you have any advice about short term goals? Are dividend paying stocks an option?  I am very new to this, so any advice you have to offer is really appreciated!

So this email begs the question.  What do you do for short term goals?  First we must decipher what short term goals are.

What are Short Term Goals?

Goals Pictures, Images and Photos

To me, short term goals are any goals you want to save up for that are in the one to three year time horizon.  Our dreams are free, but to make them come true, 99.9% of the time, you’ll need some money to make that happen.  Some of my short term goals is to save enough money for school, save enough money for my upcoming Thailand trip early next year, and also fund my journey to climb the highest peak in Africa, Mt Kilimanjaro in two years time.  As you can see, I am addicted to travel and my goals are purely associated with travel most of the time.  I’m sure yours are different.  Everyone is an individual and we all have different dreams and goals.

Here are some other examples of short term goals:

  • a down payment on a car or to even buy a used car with 100% cash
  • save money for school
  • travel
  • kitchen/bath/bedroom/floor etc. renovations to your home
  • pay off your credit card debt (or other consumer debt)
  • even a down payment for a home

How to Save Money for Short Term Goals?

You’ll be surprised how saving money here and there can really add up.  I have over $2000 in my travel fund now, and I think I started about 6 months ago.  Mint.com (remember the budgeting app I reviewed a while back) has a “goals” tab where you can track your progress to see how close you are at achieving your financial goal.  It even tells you how ahead or behind you are in saving up for this goal.  You just need to “link” the account to Mint.

I would save for the short term goals automatically of course (because I’m such a huge fan), and depending on whether you feel this goal is very important to you, you can save more aggressively for it.  For example, pay into your short term goal fund automatically (e.g put in $100 a month), and if you have any extra money you have left over, add some extra cash into your goal fund.

Of course, we need to save the money before we do anything (including investing) with it.  Now, onto the important question (and the main point of this post):

Save it or Invest it?

Because short term goals can be so important (the goal is so close that you can taste/feel/touch it) you don’t want to jeopardize the money you have so carefully socked away.  Therefore depending on your risk tolerance, it is recommended by most to keep them in fixed income based products.

These are:

  • Money Market funds- Globe and Mail has a good primer on this.  You can access your money quickly and that’s the important part.  Interest rates are comparable to high interest savings accounts.
  • High Interest Savings accounts- ranging anywhere from 1.5% to 2% at the current rates
  • Guaranteed Income Certificatesremember my “granny panties” post?
  • Bonds- the kind from our government, not corporate bonds.  Though the interest rates are pretty dismal, like 0.65 to 1.39% for Canada Savings Bonds.

Basically, anything safe.  I know that you won’t beat inflation with these dismal interest rates, but since the goals are short term, it doesn’t matter that much.  Unless you don’t mind that you might not get your principle amount you invested back and unless you’re 100% sure where the market is going (if you have a crystal ball or access to psychic friends who can tell you if the market will go up in the next year), it can be kind of risky to put your money in the stock market.  For example, although I invested in dividend investments (SLF.TO) paying me a 4.7% annual dividend yield (paying me about $112 a year) a few months back, I am currently down $250 from my initial investment.  That means, by the end of the year, if it stays at the current price (which is highly unlikely and difficult to predict because I don’t have any psychic friends with stock market specialties), I will be down $138 from my initial investment.  However, this is okay for me because I don’t need that money right away and I plan to sit back and relax (and maybe pick up some more stocks if it slides down further).  Nevertheless, the situation could be reversed and you could be making big money if you got “in” at the right time (for example, my investment in Bell has yielded me with a 25% return $1000+ from my initial investment because I bought it when the markets were slumped).  However, of course everyone always thinks we got “in” at the right time, otherwise you wouldn’t have bought the stock in the first place, right?  You just never know and if you’re willing to take that risk, then by all means, go ahead! :)

For all my short term goals (my travel fund, filling up my emergency fund), they are in highly liquid accounts where I can get my money quickly with no fuss and no muss.  Both of these are in high interest savings accounts.  One with ING and one with Manulife.

In a nutshell, for short term goals, I’d say Cash is King.

Readers, what are some of your short term goals and do you personally save or invest for your short term goals?

About

Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

29 Responses to Save or Invest for Short Term Goals?

  1. Nice glowing support! :)

    We typically use a HISA for short-term savings goals, say anything less than 2 or 3 year timeframe. This way, those funds stay very liquid. We used a HISA a couple of years ago for our house downpayment, for example.

    Our S-T goals aren’t really tied to saving anymore, they are focused on paying down our LOC. Any extra funds we have, go to that before interest rates rise. Hopefully our LOC will be paid off in 1 year.

    Cheers,
    Mark

    • @My Own Advisor- I’m really glad that HISA’s nowadays don’t require you to have $10,000 minimum like they did back in the day. Helps us little potatoes a lot ;) So do you put it in the HISA and are you planning to pay the LOC as a lump sum before the interest rates rise, or are you paying it off each month?

  2. Well deserved!
    Great support!

    I also use a ING High Interest TFSA Savings Account.
    I plan to save up (not sure how much) and than invest it in ETFs / Index Funds.

    • @Eddie- Awe thanks :) That’s a good plan! I don’t have a high interest TFSA account, I guess I get worried that I’ll lose track of taking money in and out and I will get dinged for over contributions.

  3. Great fan mail! :)
    I leave the money in my saving account for any short term goals less than 1 year. You never know what can happen with the stock market so if you need money soon, keep it liquid. I agree with you 100%.

    • @retirebyforty- Isn’t it? It made my day :) Sometimes it’s nice to have liquid money if you want to ADD to your positions in the stock market too (e.g. when the markets are down its a good time to buy), though I need to work on that a bit more. I tend to just think “awe shucks, if only I had money to buy more stocks”.

  4. I’m not always sure where to draw the line between “savings” and “investment”. Is a high-grade corporate bond held to maturity savings? Or is it investment?

    • Hmm in my opinion, I would think that corporate bonds are more of an investment… because the principle isn’t guaranteed.

  5. Anything less than 5 years is short term to me. As soon as the US government increases the I bond I plan to buy more for my 5-10 year goals. Anything else goes into my high yield savings account.

  6. I think there are always great investments to be had. Right now I’m trying out different markets other than the U.S. Having all cash wouldn’t be right for me. I would rather take my chances and try and beat inflation so at least I’d stay even.

    • @Hunter- You are adventurous! I personally did that with my own investments (I guess, in a way) because I didn’t just put everything in a savings account even though I had a short term goal of buying a home. I think also, Indexing is a good way to go about it too. It would be more balanced and it would be less prone to being affected by a huge correction. For my TD E-series, I had it in about 60% bonds and the rest were equities, and over the years, I did eek out more than inflation than I originally put in. It was my in RRSP account, and I took out $9500 of it or so for my down payment.

  7. I agree cash is king with short term goals. I use CDs, my savings account, and collect all my loose change. I save primarily for travel too. There are so many places I want to see! Climbing Mt. Kilimanjaro sounds like an awesome goal!

    • @Untemplater- Boys and their loose change ;) Better collected than falling out of your pockets. Have you cashed in to see how much money in change you have? I think it can be surprisingly high usually.

  8. Excellent advice!

    I love quality dividend paying stocks, but I always tell my students not to put any money in stocks that they will need in the short term. Generally money that you will not need for 5 years or more (the more the better) can go into quality dividend paying stocks when they are undervalued.

    • @Kanwal Sarai- That’s a very very good approach, Kanwal. I’m glad we think the same way! I love undervalued dividend paying stocks.

  9. That is such a great e-mail! I bet you lit up ear to ear when you got it.

    I am amazed that they have a paid off house, but are still looking for help, that’s great…always looking to grow.

    • @Evan- I totally did! :) It made my day, and I think week! I think as humans, we hope to never stop looking to grow, but at the same time we need to be happy where we are. I wonder if those two entities can co-exist.

  10. Come on Y & T, where is your sense of adventure? You have to let this reader in on the secrets of how we all make money on here…

    If the writer of the email is reading, what you really do is go find a “short gold ETF.” Basically this means you are betting against the price of gold. Then try and look for one that says “leveraged 3x” beside it. Leveraged just means extra cool in investment lingo, the bigger the number after it the better! I guarantee you’ll be able to afford those house upgrades in no time fast. Haven’t you ever watched investing movies? This is how they do it there, none of this “saving bit-by-bit” mumbo jumbo…

    I’m just kidding. Follow Y & T’s advice as always, I’m just jealous of the fan mail!

    • @T.M.- HAHAH…! You should write a post like that on April Fools. I was almost fooled too, you sound very convincing ;) Hey in no time you will have fan mail too- I’m a huge fan of your blog! You guys have fantastic content.

    • @101 Centavos- How much extra cash do you keep on hand? i don’t have more than $200 usually at home. In which I will likely be screwed if armegeddon comes and I need to access money from an ATM but I can’t because the computer systems are all down. I think I watch too many movies.

    • @Invest it Wisely- It’s great to get everyone’s feedback- thanks for sharing Kevin :) What are your short term goals? (a wedding perhaps? :) )

  11. From a personal standpoint, if I need to save some money for a short term purchase, I put them in a cashable GIC or high interest savings account.

    However, one thing I’ve learned along the way is that reducing costs = saving more and if I need to save a chunk of change for something important, I tend to go on a pretty intense month of thriftiness. For example, I bought another refrigerator for our basement when it went on sale after the Christmas holidays for $499. When meat goes on sale now at the supermarket, I have a lot more room to store frozen meats. For example, sometimes our supermarket has 2 for 1 butterball turkeys or amazing deals on certain items. I seriously could not believe how much money my wife and I were able to save by having the flyers sent to us by e-mail and using coupons when appropriate. Often, after a month of thriftiness, we tend to exhale a bit because it can get to be a bit difficult without splurging from time to time. But these are things that have worked for us! I suppose it comes down to how determined you are too.

    There are also some great stocks out there such as Inter Pipeline (IPL.UN) that pay a monthly distribution. It currently pays about a 6% yield and although there is a risk of the shares falling in value when you need to cash out for your purchase, some people may be totally comfortable with the risk involved – especially if the item they are saving for is not a major “need” for the family and is more of a luxury item they would like to have.

    Nice post and congrats on the props! I’m sure it’s well deserved.

    • @The Wealthy Canadian- Thanks for the great comment. A freezer came with our house too (this old beat up one we keep in the garage) and I can’t believe how amazing it is to keep extra foods and meats. I still have some costco chicken meat that I haven’t used yet (I think I bought it last month). Definitely- high yielding stocks are great, but you do have to accept the risk.

  12. Costco rocks! I love going there to load up on stuff when it makes sense. I know some people that go nuts buying bulk and they end up losing too much cash flow on the front end, but there are definitely deals that make perfect sense. I like buying the big packs of Gillette razors for example and I’m good for a whole year.

    • @The Wealthy Canadian- Yeah, I think nonperishable stuff is good to buy at Costco. I remember Squawkfox did a comparison on which place was cheaper (Costco vs superstore) and superstore won out. However if you’re wanting quality, Costco is the bomb. I swear I had some spinach I got from them that lasted ONE MONTH before wilting!

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