30 Day Investing Challenge, Day 10: Best Accounts For Short Term Goals
“Begin with the end in mind.” This is a classic quote by Dr. Stephen Covey, author of The 7 Habits of Highly Effective People, and is a great way to think about investing. Not every goal you have will require you to invest in volatile assets like stocks. For instance, if you’d set a goal at the end of 2021 to save $10,000 by the end of 2022 and decided to invest your savings in a S&P 500 index fund, you would’ve lost 22% of your money. However, if you’d invested in Vanguard’s money market fund or high yield savings account you would’ve been up 4+%. Knowing what accounts and what investments to choose for each type of goal is key to not making real losses out of paper ones (this means when your portfolio goes down but you haven’t sold anything yet, so your losses are only on paper).
Let’s start with the best accounts for short term goals. First, a recap: short term goals are those that you want to achieve in less than 2 years. They could be a week, a month, 6 months, or 18 months. Regardless, there are only a few types of accounts that work best for this type of goal:
High Yield Savings Account
This is the easiest and simplest account for short term goals. The interest rate fluctuates depending on what the Fed is up to, however this account guarantees that the money you put in is what you’ll be able to pull out whenever you need it. It’s a great account for emergency funds for this purpose. You never have to worry about “losing” money with an account like this. I put “losing” in quotes because you will lose purchasing power over time due to inflation, but that’s okay for short term goals since you won’t be leaving the money there for long. My recommendation: if your goal is less than a year, open this account.
Certificate of Deposit
Certificates of Deposit or “CDs” are accounts that usually pay a fixed interest rate over a set period of time (there are some variable interest CDs out there though). The difference between these and a high yield savings account is you can’t touch the money for the set time it’s in the account. So if you have a 6 month CD, you can’t pull the money out before 6 months without incurring penalties. Sometimes CDs offer higher interest rates in exchange for this lack of flexibility, however I haven’t noticed them being much different right now that HYSAs. The other thing to know about CDs is you have to have all the money up front when you open the account, you can’t add to it over time; this is called the “principle” or agreed upon amount when opening the account. My recommendation: if your goal is between 12 months and 18 months and you have the cash on hand already, open this account.
Brokerage Account
I know we just talked about this type of account in the last challenge and how great it is for investing, but it can also be used for short term savings. It’s all about what you invest in. For example, money market mutual funds are usually comprised of low risk assets like U.S. Treasuries or other cash equivalencies and can be purchased using a brokerage account. You can also buy total bond market index funds. We’ll talk more in depth about the types of assets you can buy if you want to invest your short term goal money in an upcoming challenge. For now, my recommendation is: if your goal is 18 months to 2 years, open this type of account.
Action Step: Open Your Account (if you don’t have one yet)
If you already have one of these accounts and it works well with the short term goals you already set, awesome! If you haven’t, go ahead and open the account now:
For the best High Yield Savings Account check out this article by NerdWallet.
For the best CD check out this article by Bankrate (and remember you have to have the entire amount when you open the account).
For the best brokerage account, consult the previous challenge.
Check back in tomorrow for your next challenge: the best accounts for medium term goals.
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