Reaching Your Short Term Financial Goals… Quickly

July… The month when America turns a year older.

It also marks the midpoint of your fiscal year. With half the year gone by already it’s a good time to do a check up on your financial goals. Are you on track so far?

There are two types of financial goals you should be making, long term and short term. Long term financial goals include retirement or college for your children. These types of financial goals are best attained by investing. When you have long range goals such as these you can afford to be riskier in your investment vehicles. You can survive the ups and downs of the markets.

When you have short term financial goals like saving for a new car, closing costs for a home, vacation or remodeling your kitchen, you can’t afford to be that risky. You don’t have time to recover from any downturns that go with stock market investing.

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A decade ago you could open a savings account at any bank and get a decent interest rate without a problem. But in this economic downturn you have to do a bit more research and ultimately settle for a lot less in interest.

Today I’d like to talk to you about ensuring you get the most return on your money when saving for the short term.

The lowest risk will be a traditional savings account. These are FDIC insured up to $250,000, which means if the bank goes under the government will cover the money you had up to that amount. These types of accounts are virtually zero risk but also offer very little reward. Current yields for savings accounts are dismal compared to just two years ago. In 2008, savings accounts were yielding as much as 4%, vs. a measly 0.1% now. They are best used to temporarily store money, but they won’t help you beat inflation or reach your short term financial goals.

This is why other types of savings accounts may be more beneficial to you. A money market account is still a savings account. It pays fluctuating interest rates that, on average, are higher than the interest rates of traditional savings accounts. These accounts provide the confidence of being FDIC insured however there is usually a minimum balance that must be maintained. And unlike traditional savings accounts transactions are limited. So don’t use this type of account in conjunction with a checking account to manage your everyday finances. This type of account has virtually zero risk but will only yield a puny interest rate.

Taking it to the Internet for Better Returns

Online-Only Banks offer the highest yield in terms of savings accounts. Because the banks operate entirely online they have lower expenses, which allow them to offer higher interest rates. These banks are FDIC insured like the rest and are as easy to pull money out of as your traditional savings accounts at your local bank. In the last ten years this area of banking has exploded in growth. As of today online only banks like ING, Ally, HSBC and others are offering interest rates around 1.50%. Not the 4% we were used to earning a couple of years ago but a lot better than the 0.1% you’re earning in a savings account at your local bank branch.

Certificates of Deposit offer the highest yields right now. CD’s offer a higher rate of return in exchange for tying up your money for a pre-determined amount of time. If you have to pull out money before the maturation date you will incur a financial penalty. Considering how low rates are right now you don’t want to tie up your money in a long term CD. Even if your short term financial goal is still five years away you want to stay flexible so that when rates inevitably go up. I recommend not investing in CD’s with 3 years or longer maturation periods. Right now one year CD’s are yielding about 1.4%. CDs are very safe investments, and most are FDIC insured.

Check out bankrate.com to compare interest rates of top yielding banks and CD’s in your neighborhood and globally.

I also want you to take a look at SmartyPig.com. It’s a cool, new website that acts as an online piggy bank. It’s free to sign up and helps their customers save for specific financial goals. Do not use this investment tool if you want to just stash your cash for a rainy day, you must have a specific need.

The website is super easy to use and cutely designed. You sign up, tell them how much you want to save and when you need to save it by, and their interactive calculator will do the math to tell you how much you should save each month to reach your financial goal. SmartyPig will then automatically deduct that amount from your checking account each month and transfer it to your online piggy bank. You’ll even earn interest! Currently SmartyPig is paying a whopping 2.15% interest rate. It’s the highest yielding FDIC insured savings account I’ve found so far! You can also ensure you meet your goal by telling friends and family of your endeavors. SmartyPig gives you a widget to place on your Facebook, Twitter or MySpace page to show off your saving progress bit by bit. Once you reach your goal you can transfer your savings plus interest back into your bank account or for even higher yielding results you can have SmartyPig place your savings on a retail gift card which pays up to 12% in cash incentives. This option
works best if you’re saving for something like a new TV which will allow you to put your savings plus bonus onto a gift card for stores like Best Buy or Sears.

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Grabbing an Even Better Short Term Yield

If earning rates of one to two percent makes your short term financial goals turn into long term ones then look into short term bond investing. These are riskier than parking your cash in a savings or money market account, but the reward is higher. There are short-term bonds available that only take one to two years to reach maturity and realize significant gains. The typical return on these types of bonds is roughly 3%. There are 4 main categories of bonds; corporate, government, agency, and municipal. Each has its own set of pros and cons. The yields of short term bonds with the least risk, such as government and municipal, are as low as traditional savings or money market accounts. So I won’t go into those.

Agency bonds come from government institutions like Fannie Mae or Small Business Administration. Although they come from government agencies they are not insured by the government. However, the government would most likely step in to support any of these agencies that ran into trouble. Because of this, they are considered safer than average.

Corporate bonds represent debt issued by companies. The interest rates they pay are higher than other bonds, but the bonds are also more vulnerable. The company that issued the bond could suspend interest payments, or even go belly up. So researching the bond ahead of time is key. Moody’s and Standard & Poor’s rate companies as to their ability to meet their debt obligations. Bonds work just like CD’s in that there is a pre-determined maturation period in which your cash will be tied up. So if maintaining liquidity is essential then consider other investing options.

Whatever type of account you choose base your decision off of these three things.

1. Need for Liquidity

2. Interest Rate

3. Risk

If you need to have access to your cash at the drop of a hat then don’t choose a certificate of deposit or bond. Choose a type of savings account I outlined above.

When considering interest rate think about how much the institution will pay you to park your cash and does the amount you have to invest qualify you for the best rate. Go for convenience in making the deposit and redeeming it.

Though your short-term savings will never yield the kinds of returns the stock market provides over the long term, your cash should still earn its keep. Comparison shopping can help you find out which types of accounts offer the best interest rates for your specific risk/reward relationship and liquidity needs.

Remember that investing for the short term carries significantly higher risk than long-term investments. You don’t have time to recoup your losses as you do in long term investing. You need to make sure that you educate yourself and do considerable research before jumping in.

Keeping Money In Your Pocket and Making Your Money Work For You,

Nancy Patterson