How to Invest for Short-Term Goals (Less Than 10 Years Out)

Raise your hand if you’re trying to save for something big in the next 10 years.

A new car? Your wedding? The down payment on a home? More education?

Most financial advice tells you to save for two –- maybe three — things: A rainy day (the cash you stash away in your emergency fund), retirement and, once you have kids, their college education.

But what about everything else? Are we just supposed to go into debt to pay for all that stuff?

Why you don’t hear about investing for short-term goals

Actually, I suspect that’s why we don’t see more written about saving for these short-term goals…most people don’t save for them: They finance the new car. They put their wedding on credit cards. They get a bigger mortgage rather than put money down. They get student loans.

But you’re not like most people. You know you’re going to need big money to get married or buy a home in several years, and you want to start planning for that. One problem: Bank savings interest rates suck and stocks can seem risky.

What you can do to save money you’ll need in 10 years or less

The solution for short-term savings is a properly allocated investment portfolio that holds bonds and stocks. You need stocks because bonds likely won’t deliver the kinds of returns you want; you need bonds because the an all-stock portfolio increases your risk of being stuck with a negative return when you need to withdraw the money.

Personally, my wife and I have a savings account with a six-month emergency fund in cash and a non-retirement brokerage account with a mix of index funds: 60% stocks and 40% bonds. (Our retirement accounts are more aggressively allocated with about 80% stocks.) At the moment we’re not saving for anything in particular aside from retirement and our children’s education, but we might adjust that allocation if we need to hit a certain amount of money at a certain time.

Short-term investing with mutual funds

If a self-selected mix of index funds is the advanced way and Betterment is the easy way, there’s an intermediate option: Mutual funds designed specifically for short- or mid-term investing goals.

These funds will be managed to preserve your capital while hopefully providing decent returns for your desired time frame. Vanguard’s Life Strategy fund family includes examples.

Of course, you can always leave your short-term savings as cash in savings accounts or certificates of deposit, but at less than 2% interest and with inflation as a constant concern, doing so is just barely better than leaving the cash under your mattresses.

What about you? How do you save or invest for short- or mid-term investing goals in the next 10 years or less?