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4 Ways to Save for Your Short-term Goals

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What we’ll cover:

You probably have a few #moneygoals that you're working on and eventually hope to check off. Some of these may be long-terms goals, like paying off a mortgage, building a nest egg for retirement, saving up a college fund for your kids and more.

Then there are near-term goals. Maybe those include things like putting away enough funds to go on that dream summer vacation, buy a new car or just beef up your emergency fund. You may be hoping to pull these goals off sooner, say within the next year or few months.

When it comes to defining what a "short-term" goal is, it might be helpful to consider your own timeline so that you can think about your strategy and which account you might use (more on this later). For instance, your financial strategy for saving for retirement is likely going to be different than saving up to buy a car.

Below, we'll dive into what exactly short-term goals might be and offer up some options that could help you pursue them.

What are short-term goals?

To start, let's review what a short-term goal is (seems obvious, but hey, a little refresher never hurt). Think of short-term goals as something you can save up for in about one to three years. Of course, your mileage may vary, but that's a general timeframe to keep in mind.

Examples of short-term goals could be things like saving up for an emergency fund, a new car, house repairs or a wedding.

On the other end of the spectrum, long-term goals typically require many years and even decades to accomplish. Think: saving up or retirement, paying off your mortgage or sending your kids to college.

Your timeline could impact your financial strategy.

Why are we getting hung up on the details? Good question! It's because your timeline could impact your financial strategy. Here are two things to think about:

Returns

While the US stock market has historically outperformed the interest rate of bank accounts, investing can also be a lot riskier (although past historical performance is not an indicator of future performance).

After all, you may make some money but could also lose some (or a lot) or money. So if you only have a few months or years to reach your goal, it might be safer to park your money in another, less risky vehicle. (We'll get to examples of those soon.)

On the other hand, say you do have several years or decades until you need to withdraw your money. This could give you enough time to potentially wait out market dips, and you could potentially get a better return on your money by investing it in the stock market.

Liquidity

Something else to think about is liquidity, or how accessible your money is if you hold it in a financial vehicle. If you need to withdraw money at a moment's notice, that's likely going to be easier to do from a savings account than your brokerage account.

With all that, let's jump into some account options that can work for short-term goals you have, taking into account factors like returns and liquidity.

Defining your short-term goals

Now that we've discussed the timing of "short-term" goals, start thinking about what you'll need to accomplish those goals.

You'll probably want to start with figuring out how much you'll need to save to make that goal a reality. For example, saving $10,000 for that dream beach vacation. Once you've got a number in mind, you can then take a look at your budget and spending habits to see if you need to make any adjustments.

Regardless of how you decide to tackle the initial saving amount, parking that money in the right vehicle might help you reach your goal  - and who doesn't love making your money work for you?

1. High-yield savings accounts

You’re probably already familiar with high-yield savings accounts, or savings accounts in general. Thanks to the ease of withdrawing your money, savings accounts can be a great option for putting away money for short-term goals. 

One benefit relates to liquidity and the fact that you'll be able to withdraw funds pretty much whenever you want (although you may be capped on the number of withdrawals you can make a month). That can be helpful for unexpected expenses that may pop up, like needing to replace your car tires.

While savings accounts are considered liquid and safe, you might not see a higher rate of return compared to what you'd get in the market.

High-yield savings accounts from FDIC-insured banks are also considered a pretty safe place to park your cash, since they’re FDIC-insured up to $250,000 per depositor, per bank.

One thing to keep in mind: While savings accounts are considered liquid and safe, you might not see a higher rate of return compared to what you'd get in the market (although investing in the stock market has its own risks). For the week of June 30, 2021, Bankrate reported the average interest rate of savings accounts was just 0.06%.

That means, on average, for every $1,000 in a savings account, you're only earning 60 cents a year. So while a savings account might be a great option for parking cash you could need at a moment's notice, there may be other options that allow you to earn a little more interest on your money if you don't need it for emergencies or plan on touching it for some time.

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Reaching your goal starts with saving for it. 

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2. Certificate of deposit (CDs)

Certificate of deposit, or CDs, are a type of deposit account that usually offer a higher interest rate than a traditional savings account.

In exchange for that higher interest rate, though, you agree to lock up your money for a set amount of time, called the CD term. If you withdraw your money before the CD term is up, you could be charged a penalty fee (except in the case of No-Penalty CDs, which you can learn more about here).

When the CD term is up, your CD “matures" and you can take your money out.

CDs come in a range of term lengths (6 months, 12 months, 18 months, etc.), and generally, the longer the CD term, the higher the interest rate.

Good to know: CDs typically come with fixed rates, meaning the interest rate won't change during the CD term.

When the CD term is up, your CD “matures" and you can take your money out or put it in another CD with the same term, or put it in another CD with a different term - essentially, once your CD matures, you have a few options for your money.

Although having your funds locked up for a set amount of time may not make them as accessible, or liquid, as they might be in a savings account, CDs can still be a good option for near-term goals.

If you have a specific goal you're saving up for and want earn a little interest in the meantime, you might be able to find a CD term that lines up with when you'll need the money.

For example, if you know you want to purchase a car a year from now, a 12-month CD could help you reach your goal by earning some interest between now and then.

3. Money market accounts

A money market account (MMA) is a type of deposit account that traditionally earns a higher interest rate than savings accounts, and also may come with a debit card and checks. So let's say you're saving for a wedding, and want to earn some interest on your savings, but also need to pay various vendors throughout the planning process - an MMA may be a good option for you.

The average interest rate you can typically earn with a money market account is usually lower than what you could earn with a CD. However, accessing the money in an MMA tends to be much easier, since your money isn't locked up the same way it is with a CD.

You can continue to add money to an MMA on a regular basis, and depending on the terms, may be able to withdraw money using a debit card or checkbook, in addition to digital withdrawals.

When deciding between a CD and a money market account, it can be helpful to consider how accessible you want your money to be and weigh that against the potential interest you could earn.

Note: Money market accounts (MMAs) are sometimes confused with money market funds, or money market mutual funds - but they're all different products. As mentioned, MMAs are deposit accounts offered by banks and credit unions. Money market funds, on the other hand, are offered by brokerage firms.

4. Bonds funds

While you might already know what a bond is, a quick refresher never hurts - a bond is essentially a loan given to a company or government that returns a fixed rate of return.

Bond funds can be a more efficient way to invest as opposed to buying individual bonds.

While bonds are typically considered safer than stocks, there's still some risk involved. That risk is primarily the chance that the bond issuer defaults on the loan. To get around some of that risk, bond funds comprised of government bonds - whose risk of default is typically lower - can be a good option for your short-term goals.

Bond funds can be a more efficient way to invest as opposed to buying individual bonds. You can buy bond funds as an investment, and then sell them when you need the money.

Bond funds also allow you to invest in multiple securities, similarly to investing in ETFs, so they can help with diversification even for a small and/or short-term investment.

Parting thoughts

All the financial vehicles we reviewed could help you reach your short-term financial goals. (You might even use some of them for long-term goals.)

Know that you don't necessarily have to pick one or the other - you could have a few of these accounts, depending on what your goals are, how soon you'll need to access the funds and what kind of returns you'd like to see. After all, personal finance is, well, personal, and so are your financial goals.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.