personal finance  |  july 22, 2020

3 Steps to Save for Short Term Financial Goals

Taking these actions can help you achieve your near-term financial objectives.

 

Key Points

  • Set a financial goal, and decide when you’ll need the money to fund it.

  • Use investments that are likely to hold their value.

  • Invest money regularly to help keep your savings on track.

1. Set your goal and time horizon.

Establishing your time horizon—when you’ll need the money—is an essential first step in setting up a short-term savings plan.

2. Determine your asset allocation.

Keep all or most of your savings in investments that are likely to hold their value over a short period, such as money market securities or short-term bond mutual funds. If your time horizon is three years or longer, consider allocating a small portion to equities.

3. Invest money regularly.

If possible, have a set amount deducted automatically from your bank account or paycheck to help you save consistently.

What’s your goal?

Vacation

$3,500

$583

per month for 6 months1

Months 1-6

100% short-term investments

Emergency Fund

$20,000

$829

per month for 2 years2

Years 1-2

100% short-term investments

House Down Payment

$65,000

$1,018

per month for 5 years3

Years 1-3

50% fixed income,
30% short-term, and
20% equity investments

Years 4-5

100% short-term investments

1Assumes a 0.5% average annual rate of return.
2T. Rowe Price recommends saving 3 to 6 months’ worth of expenses in an emergency fund; example uses 4 months of expenses for an individual earning $75,000 per year and monthly expenditures of 80% of income. Assumes a 0.5% average annual rate of return.
3The figure is based on 20% of a hypothetical $325,000 home price. Assumes a 2.5% average annual rate of return and that all assets are moved to 100% short-term investments at the beginning of year 4.

Examples are for illustrative purposes only and do not represent any specific investment. The model allocations are based on the needs of hypothetical investors only. These allocations do not take risk tolerance or individual circumstances or preferences into account and may not align with your view of the appropriate levels of trade-off between potential return and volatility.

All investments involve risk, including possible loss of principal. Investing consistent with a model allocation does not protect against losses or guarantee future results. Short-term bond funds have a different risk profile than an investment in money market securities. Fixed income securities are subject to credit risk, liquidity risk, call risk, and interest rate risk. As interest rates rise, bond prices generally fall.

This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making.  

202007-1249913

 

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