How to Use Investing for Short-Term Goals

By Miranda Marquit

When many of us think of investing, we focus on long-term goals, like retirement or saving for college. However, it’s possible to use investing for short-term goals as well. Once you get started investing, you might be surprised at how much you can accomplish, even over a short period of time.

Here’s what you need to know about investing for short-term goals.

Set Up an Account for Your Short-Term Goals

I use investing for short-term goals like travel. An investing tool like Betterment or Acorns can help you set up an account for a short-term goal. One of the nice things about these types of accounts is that you can automatically transfer money into them each month.

Figure out how much money you want to move into the account each month to help you reach your goals. I actually have a travel fund that I contribute to each month. Later, when I’m ready to plan my travel, I can sell some of the assets to get the money I need.

A tool like Acorns can make it even easier by allowing you to set roundups from your spending on top of using regular transfers.

No matter how you do it, having a dedicated account for your short-term goals can help you make progress and earmark the money for what you want to accomplish.

Set an Asset Allocation that Works for You

Next, figure out what asset allocation is going to work best. I have a fairly aggressive asset allocation for my retirement account because I know that I won’t need that money for a couple of decades.

On the other hand, though, my travel fund has a more conservative mix of 52% stocks and 48% bonds. That way, it’s a little less volatile when it comes to stock market issues. This provides me with some peace of mind. If you’re even more squeamish than I am, you might put a large portion of your assets allocation toward bonds and other securities that are seen as less risky.

I like to use brokers like Betterment and Acorns because they allow you to adjust your asset allocation and they make use of index ETFs that include stock and bond ETFs. Rather than trying to pick stocks or find the right bonds, this approach can help you take advantage of a wider swath of the market, and offer a level of protection against risk.

The nice thing about using investments, in whatever allocation you choose, is that you’ll get a better potential return than you’d see with a savings account. Even a high-yield savings account isn’t as effective as an investment account that can offer you better potential returns.

This can grow your account a bit faster, helping you reach your goals sooner. In my case, this allows me to have an ongoing fund that keeps earning, and that I don’t deplete completely when I use it for travel.

Be Aware of Taxes When Investing for Short-Term Goals

You do have to be aware of the tax situation when it comes to investing for short-term goals.

First of all, one of the advantages of using investments for short-term goals is that if you have to sell at a loss, you can deduct that loss on your taxes. I’ve actually done this in the past.

You need a strong stomach, though. Remember, the point of your account is to have capital available for you when you’re ready to use it, so selling at a loss is a risk you take. But if you can claim a tax deduction for it, and you have the money to meet your goal, it might not feel like such a loss.

On the other hand, you might have to sell for a gain. In that case, you might have to pay taxes on the earnings. When I started my travel fund, I did it with the understanding that I wouldn’t use the money until I’d had at least a year to build it up so that I could take advantage of the favorable long-term capital gains rate.

In order to qualify, you need to sell your investments at least a year after you buy them. Otherwise, they are short-term gains and they’ll be taxed at your regular marginal tax rate, instead of at a potentially lower tax rate. Most brokers will automatically sell your stocks using a first in, first out approach, so you don’t have to go through the process of figuring out which assets to sell when you’re ready to use the money.

Are taxes really that expensive?

I’ve found, however, that in most cases the taxes don’t amount to a huge amount. For most people, just liquidating assets for short-term goals isn’t going to result in a huge gain.

Last year, I sold some assets to pay for a trip and my added tax bill came to $50. Not bad considering the gains I got far outstripped the taxes and I was able to go on a good trip.

Bottom Line

In the end, it’s important to be comfortable with what you’re doing and how things could shake out. If you have the stomach for it, investing for short-term goals can be beneficial.