Creating a Strategy to Pursue Short-Term Goals
Short-term financial goals require a different strategy than long-term goals. Here are some issues to consider when you're going to need your money sooner rather than later.
Pursuing short-term financial goals - those that you'd like to achieve within one to five years, such as a down payment on a home - requires a different strategy than pursuing long-term goals. Here are some issues to consider when you're going to need your money sooner rather than later.
Clarify your financial goal. Setting a specific short-term goal will help you to evaluate your progress toward meeting it. For instance, the vague objective "I want to save money to buy a new car" becomes "I want to save $20,000 over five years to purchase an American-made sedan."
Take action. How will you save the money that you need? Eating out less often, canceling a newspaper subscription that you don't read or downgrading your cable from a premium to a basic plan could easily trim $100 per month from your expenses. Evaluate where you can free up cash to put toward your financial goal.
Match your investments or savings vehicles with your goal. Safety will be a priority if you'll need your money within a few years. Stocks can experience extreme fluctuations over short-term periods. You don't want to be forced to sell your assets when the value of your investment has dropped. Better choices for short-term needs may be conservative instruments that offer a more stable return, such as short-term bond funds and money market funds. Federally insured savings vehicles, such as certificates of deposit, may also play a role.*
Short-term bond funds primarily invest in U.S. government or corporate debt with maturities that range from one to three years. Money market funds pool investors dollars to buy short-term securities, such as Treasury bills. Both of these choices aim to produce current income. At the same time, they offer liquidity (how quickly you can sell an asset), and usually aren't subject to the dramatic ups and downs of stocks. Certificates of deposit are interest-bearing debt instruments with a wide range of maturities. In exchange for purchasing a certificate of deposit, the investor will receive the return of principal plus interest at the maturity date.
Finally, remember that short-term financial objectives should not take away from investing for long-term goals.
*An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corp. (FDIC) or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund. The fund's yield will vary. Certificates of deposit offer a guaranteed rate of return, guaranteed principal and interest and are generally insured by the FDIC. Early withdrawal of certificates of deposit may be subject to penalty.
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