30 Day Investing Challenge, Day 19: What Should You Invest In For Short Term Goals?
Each type of goal you set during this challenge will have a different timeline. Because of this, you want to be careful what kind of investments you choose. The more volatile the investment (meaning the more it has severe highs and lows) the more time you want to give it to work its magic.
Why You Shouldn’t put Short Term Savings in the Stock Market
Let’s say it’s December 2021 and you have a goal of going on a European excursion for the 2022 holidays. That gives you a year to save up. The stock market at the end of 2021 is up 9.16% and has been up most of the year, so you decide to save for your trip by investing in a total stock market index fund in your brokerage account. The problem is, by Autumn 2022 the stock market had plunged 26.77% and ended the year down 19.53%. If you’d invested $200/mo over that time you would’ve ended the year with $2,173.08. If you’d sold at the end of the year you would’ve lost more than a month’s savings because of market volatility.*
This is why leaving your money in low risk accounts and investments is the best way to save for short term goals. Here are some great options:
High Yield Savings Account (HYSA)
High Yield Savings Accounts or HYSA for short are savings vehicles that pay 10-12 times more than traditional savings accounts. Interest rates as of April 2024 are in the 4-5% range. If you would’ve put that $200/mo for your European vacation in a HYSA paying 4.5% interest you would’ve had $2450 by the end of the year, $50 more than what you contributed. Even if the interest rate dropped within that year, you would’ve still been guaranteed $2400 by the end of 2022.
What To Watch Out For
There are a few factors to watch out for when shopping for a new HYSA:
Interest rate and how it’s paid out - sometimes banks only give you a higher rate if your balance is above a certain amount.
Required initial deposit - some accounts may have a deposit minimum.
Minimum required balance - some banks require you have a certain amount in your account or you won’t get the high interest rate.
Fees - the account may come with fees, so make sure you know about all of them.
How To Find The Right Account
The highest rates are usually available at online-only banks because they don’t have a lot of overhead costs. You can easily find a HYSA by searching “Best HYSA for [insert year]” and choosing a non-sponsored search result (Nerd Wallet is my favorite).
Money Market Fund
Money Market Funds or MMFs are a low-risk mutual fund. MMFs offer higher returns than HYSAs because they’re invested in assets, however these are considered low risk. MMFs are a great place to invest money in the short term, but are not suitable for long term savings.
What To Watch Out For
MMFs do have more risk than HYSA. The only risk when putting your money in the HYSA is that the interest rate will go down, but you’ll still have your initial deposit amount. Since MMFs are an investment you’re subject to market fluctuations and could actually lose some value of your initial investment. I recommend MMFs for short term goals that will take over a year to save for. Everything under a year can go into a HYSA.
How To Invest In A MMF
All of the discount brokerage houses like Vanguard, Fidelity, and Charles Schwab will have money market funds. You’ll need to open a brokerage account with one of these firms to invest in this type of fund (you can use the one you chose during day 9’s challenge). My personal favorite is Vanguard’s VMFXX because it has a 5.27% 7 day yield (as of April 19, 2024) and consistently returns higher than its benchmark.
Action Step: Answer These Quiz Questions
True or False?
Short term goals should be invested in stocks for maximum growth.
High yield savings accounts are a great place to put short term savings.
I’ll see you here tomorrow for your next challenge: What should you invest in for medium term goals?
*Selling investments that are down is the only way to actually lose money in the stock market — if you would’ve left the investments alone you would’ve had almost $3000 today.
Quiz Answers: 1. False, 2. True.
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