Everybody invests for a reason. For many, it’s to build retirement funds — in addition to investing in a 401(k) or Individual Retirement Account, putting money in the market can create opportunities to reach a variety of financial goals. For others, they might invest with the ambition of increasing their net worth by generating returns. But investing can be utilized as a powerful savings tool for specific intermediate goals as well.
Why invest to reach specific savings goals?
You might be thinking, “I already have a savings account, why bother investing?” The answer is simple: Investing in the market gives you the potential of earning greater returns than keeping your money in a savings or money market account. While cash you keep in a savings account might earn interest, it’s likely a low percentage. And historically, the stock market has generated about a 10% return annually.
Of course, it’s also important to understand that when you invest, you incur the risk of losing your capital. So any money you need to keep safe, like emergency fund savings, is better kept in a FDIC-insured savings account. But funds that can withstand some market risk or that you won’t need for several years may be able to work harder for you when invested in securities like stocks or bonds.
Non-retirement Investment Goals
When using investing as a vehicle for saving money, it may not make sense for all your goals. For example, if you’re saving up to buy a new TV next month, you probably won’t see a significant difference by putting that cash in the market — and you would be taking on potential risk. But for savings goals that are several years off, say five or more, you might find investing is the route for you.
Is buying a house in your future? Then a down payment likely is too. Typically, down payments aren’t a small sum of money — most people pay around 5% to 20% of their property’s cost upfront. That means you’ll need a significant amount of cash saved up.
While it’s possible to save for a down payment using a savings account, you might find investing has the potential to help you reach your goal faster while maximizing your cash. Just keep in mind, the more time you have to invest your savings, the more time you have to recover from short-term market ups and downs. If you plan to buy within a shorter timeframe, you might consider investing just a portion of your savings or aim to invest in lower-risk assets to protect your capital.
As a parent, you want to set your kids up for success, which likely includes education. Like any financial goal, the sooner you start saving, the better — especially if you decide to invest those savings. The longer your money is in the market, the more you get to take advantage of compounding returns.
While you may choose to invest in a regular investment account, you can also save for this goal using an education-specific account, such as a 529 or a Coverdell Education Savings Account (ESA). Similar to an IRA, these accounts allow your investments to grow tax-free and be withdrawn tax-free.
Vacations and Big-ticket Items
If you have pricier personal goals that aren’t timebound or are a few years off (like a dream summer getaway, season tickets to your favorite sports team or a designer handbag), you might choose to put that money in the market. Since you (hopefully) won’t need to rely on these funds in an emergency, it shouldn’t be a big deal if they aren’t immediately accessible. Think about whether you feel comfortable taking on a little more risk with these more fun-oriented funds, since they aren’t as pertinent to your overall financial health.
Considerations When Investing for Goals
Regardless of what you’re investing for, ask yourself before you start:
- What is the amount I am aiming to reach?
- When do I need the money?
- How much risk can I withstand?
By answering these, you’ll have a framework to create a plan and pick out the best kind of account for you. That might be a more general investment account from a brokerage like Ally Invest, which offers Self-Directed Trading accounts and Robo Portfolios. Or depending on your objective, you might look for something more specific, like a 529 savings account for education.
Once you’ve begun investing, keep your time horizon in mind and risk level in check. As you approach your goal date, you may want to start lowering your risk exposure by gradually moving money out of the market or shifting to a more conservative portfolio. That way, your savings are less likely to be derailed by potential short-term market drops days or weeks before you need the cash.
Go get your goals.
Investing can be a wealth-building tool for long-term financial goals, but it doesn’t have to be exclusive to retirement. While it’s important to be aware of the risks of putting your savings in the market, the potential for higher returns can make investing the ultimate savings strategy.
Invest hands-free today to reach for tomorrow’s goals.