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 Tangerine, 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?
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
- 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 $2,000 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.
- 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 Certificates – remember 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 your Questrade account and play 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 my online-only bank (Tangerine) 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?