What are you doing with money you’re setting aside for short-term savings goals?
Money you’re saving for eventual retirement or financial freedom should be invested in stocks that have the potential to outpace inflation in the long-run, but you don’t want to risk an all-stock portfolio for money you’ll need in less than five years.
And we’re not talking about your emergency fund — which should be safely tucked away in a safe saving account that you practically forget about.
So what do you do with money you’re saving for vacations, a new car or home, or maybe even your wedding?
An online savings account is still a good option. It’s insured, after all, but earning 0.50% APY means you’re money isn’t going to work very hard for you while it’s stashed.
To earn more than that, you’ll have to accept some risk. Although nobody wants to put away $10,000 for a new car only to find out it’s worth $9,500 in three years, part of investing is accepting some risk for the potential of having your money grow.
One option is mutual funds that cater to mid-term savings goals; these funds offer a mix of bonds and conservative, dividend paying stocks that aim to maximize return while minimizing volatility in the short-run.
While mutual funds are still an attractive option for short-term savings, another option to consider is Betterment. An advantage of Betterment over most mutual funds is that there’s a $10 minimum amount required to get started. (Many mutual funds require minimum initial investments of between $1,000 and $2,000.)
Here’s how it works: you enter the goal, how much you want to save per month, and Betterment creates a portfolio of index funds that will aim to reach your goal. The interface shows you both your likelihood of reaching the goal and how much you might end up with both in good and bad market conditions.
Read more about Betterment in our review or open an account with Betterment here.
Wealthfront is a similar solution, letting you build, manage, and even automate your investment portfolio all with minimal fees or hassle. You can even choose from a variety of specialty investments, like those focused on social responsibility, healthcare, or technology.
The app also includes powerful saving tools, which let you funnel cash toward specific goals automatically — no extra work necessary.
Read more about Wealthfront in our review or open an account with Wealthfront here.
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