When you think about your financial future, you probably have three kinds of goals: short-term goals, like a vacation you plan to take later this year, near-term goals, like a down payment for a house, and long-term goals, like sending a child to college or retiring. In order to give yourself the best chance of comfortably reaching those goals, you should approach your short-term, near-term, and long-term savings differently. Here\u2019s exactly what you need to know.<\/p>\n\n\n\n
First, let\u2019s talk about the difference between the three types of goals. As a rule of thumb, we define a short-term goal as anything in the next year, a near-term goal as something in the next one to three years, and a long-term goal is anything more than three to five years away. If your goal is in the middle of that range, say four years, you should take into account how flexible your timing is. <\/p>\n\n\n\n
For example, if you know you will definitely want to buy a new home in four years and you have no flexibility on the timing, you may want to treat that as a near-term goal. But if you are pretty flexible and would be OK waiting another year or so if you needed to, it\u2019s probably fine to treat buying that home as a long-term goal.<\/p>\n\n\n\n
If you have a short-term goal, within the next year, it\u2019s important to make sure the money you\u2019ll need is available when you\u2019re ready to invest or spend it. That\u2019s why you should save for short-term goals in a high-yield cash account. By using a high-yield cash account (like the Wealthfront Cash Account<\/a>) you can avoid taking market risk with your short-term cash and also earn many times the interest you\u2019d otherwise earn at a traditional bank. You should choose an account that doesn\u2019t charge fees, as fees will erode your wealth over time<\/a>. You\u2019ll also want to pick an account where your savings will be FDIC insured<\/a>.<\/p>\n\n\n\n Avoid the temptation to invest your short-term savings. Financial markets are unpredictable in the short term, and it would be unfortunate to need cash at the exact moment your investment portfolio temporarily declined in value. This is the same reason that it typically makes sense to keep your emergency fund<\/a> in a high-yield cash account instead of in the market.<\/p>\n\n\n\n If you\u2019re planning for a big expense one to three years from now, we consider that a near-term goal. To save for your near-term goals, you have a few different options. One is to hold your savings in your high yield savings or cash account for a longer period of time. If you\u2019re in the market to buy a home and waiting for the perfect opportunity to come along, you might prefer to hold those savings in cash so that you can jump at the opportunity sooner than you expect. If you\u2019re open to taking on some risk and you know the opportunity is going to be at least a year from now, a good optimization option for your savings is to invest in a fixed income product like Bonds or a certificate of deposit (CD). Bonds and CDs are lower risk than equities but have a higher potential earning than saving your money in cash. <\/p>\n\n\n\n It can be tempting to put all of your extra cash in just one or two bonds but like investing in equities, the best way to mitigate risk is to diversify across multiple bonds or bond ETFs.<\/p>\n\n\n\n There are many ways to invest in bonds: investors can purchase a bond directly through a brokerage firm or TreasuryDirect, or by investing in bond ETFs or mutual funds. Unfortunately, buying bonds directly can come with challenges: high minimums, lack of diversification, and liquidity restrictions. CDs come with similar liquidity challenges including set maturity dates and early withdrawal penalties. They also lock you in at a set rate that does not increase as interest rates rise leaving you at risk for earning less over the entire lockup period.<\/p>\n\n\n\n Bond ETFs avoid all of these obstacles because like a stock ETF, these are traded on stock exchanges throughout the trading day and hold a basket of bonds allowing it to remain liquid. This means the money is available to you regardless of a single bond\u2019s maturity date and they are naturally more diversified than an individual bond.<\/p>\n\n\n\n Our Automated Bond Portfolio<\/a> is made of a diversified mix of bond ETFs to provide a higher yield than Treasury bills, CDs, and high-yield savings accounts. They provide more liquidity than I bonds and CDs, less risk than equities and corporate bonds, and are tax optimized for your personal situation. This combination makes it a great place to grow the savings that you need soon but not urgently (those you hold in cash).<\/p>\n\n\n\n If you\u2019re saving for a purchase you won\u2019t make within the next three to five years, that\u2019s a long-term goal. To save for your long-term goals, a good option is to invest in equities. Many people are tempted to hold their long-term savings in cash, but the problem with saving for long-term goals in a savings or cash account<\/a> (even a high-yield one) or even in bonds<\/a> is that the rate of earning on these accounts has seldom kept up with inflation<\/a> over the last decade. This means over time your savings can actually lose buying power. Investing in equities can help you avoid this problem by allowing you to earn a higher rate of return over the long term with a little added risk.<\/p>\n\n\n\n There are a lot of different ways you can invest your money, but we suggest that you invest in a diversified<\/a> portfolio of low-cost index funds instead of investing your life\u2019s savings in individual stocks (which is riskier and more likely to end in you losing money). You don\u2019t have to take our word for it: academic research<\/a> has consistently found that diversifying your portfolio across asset classes is the best way to maximize returns across every level of risk. <\/p>\n\n\n\n When choosing an investment account, there are two main types to consider: tax-advantaged (meaning they come with tax breaks) and taxable. 529 accounts and IRAs are examples of tax-advantaged accounts you can use to save for specific goals like sending a child to college or retirement, respectively. However, it\u2019s important to understand that these accounts come with withdrawal restrictions and penalties if you don\u2019t use them according to the rules governing each specific account type. Taxable accounts, on the other hand, are highly flexible. You can use them for whatever you want, and you won\u2019t pay a withdrawal penalty for taking your money out. Plus, if you use a taxable account, you can conduct tax-loss harvesting<\/a>\u2014a strategy that takes advantage of market volatility to lower your tax bill. How much can this help? In 2022, Wealthfront\u2019s automated Tax-Loss Harvesting service<\/a> generated average estimated tax savings worth 15x our annual 0.25% advisory fee for clients who started using the service in a Classic<\/a> or Socially Responsible<\/a> portfolio last year. <\/p>\n\n\n\n In short, using a taxable investment account to save for a long-term goal means your savings have a better chance of increasing in buying power and growing significantly\u2014and you\u2019ll also have plenty of flexibility. Typically, the longer you stay invested<\/a>, the better the odds that you\u2019ll earn returns.<\/p>\n\n\n\n There\u2019s an easy way to think about saving for your goals: risk and return are correlated. The higher the risk, the higher the expected return. This means in situations where you can\u2019t afford to take any market risk (like when you\u2019re saving for a short-term goal), you\u2019ll sacrifice higher returns. But when you have a longer time horizon, your willingness to take on market risk can result in higher returns down the road\u2014especially once you factor in the impact of compounding<\/a>. <\/p>\n\n\n\n Here\u2019s what you need to remember:<\/p>\n\n\n\n No matter what kind of goal you\u2019re saving for, Wealthfront offers the accounts you need to meet them with confidence. For your short-term savings, like your emergency fund or what you\u2019re intending to invest in the future, you\u2019re intending to invest, our Cash Account<\/a> comes with a 3.30% APY through partner banks, no account fees, and up to $8 million of FDIC insurance through our partner banks (which is 32x what you\u2019d get from a traditional bank). For your near-term savings, we offer our Automated Bond Portfolio<\/a>, a diversified portfolio of Bond ETFs that we build and optimize to your personal tax situation. For your long-term savings, we offer taxable and tax-advantaged Automated Investing Accounts<\/a> with diversified portfolios of low cost index funds, personalized to your risk tolerance and goals. The Automated Bond Portfolio and Automated Investing Accounts come with a full suite of our award-winning automation features designed to maximize your after-tax returns and make investing effortless.\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":" When you think about your financial future, you probably have three kinds of goals: short-term goals, like a vacation you plan to take later this year, near-term goals, like a down payment for a house, and long-term goals, like sending a child to college or retiring. In order to give yourself the best chance of […]<\/p>\n","protected":false},"author":129,"featured_media":15899,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1282,2390],"tags":[2418,1462],"coauthors":[2508],"class_list":["post-13817","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","category-saving","tag-long-term-goals","tag-long-term-investing"],"acf":[],"yoast_head":"\nInvest for near-term goals in a diversified portfolio of bonds or bond ETFs<\/h2>\n\n\n\n
Save for long-term goals in an investment account<\/h2>\n\n\n\n
Key takeaways <\/h2>\n\n\n\n
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