How to save for short-term goals while keeping long-term ones in mind

You shouldn't have to cross your fingers and hope for a strong stock market to coincide with your short-term goals. And right now, you probably wouldn't want to.

Because you're working within a short time frame—think two to six years—investing for shorter-term goals like buying a house or paying for a wedding should look different from the portfolio you build for retirement. But don't stop putting away money for your long-term goals while you're working toward your short-term ones.

So, how do you balance saving for both?

How to think about funding short-term and long-term goals

Don't forgo saving for the long term to meet your short-term goals. Thanks to the power of compounding over time, saving early can have a large impact on your long-term outcomes. The longer the time frame, the greater the potential impact. You should put retirement front and center, especially as you approach your midcareer.

Earlier in your career, you might shift your savings somewhat to shorter-term goals, but retirement should still be part of the equation. At least, take advantage of any retirement match that your employer might offer. To some extent, what you're saving for can tip the balance as well. You might direct more of your savings away from retirement if you're saving for a house than if you're saving for a vacation.

Account types that work for short-term investing

It's helpful to separate your short-term portfolio from your retirement portfolio, but there are some accounts that you can use to multitask. Depending on your situation, you might use a tax-deferred account, like a Roth IRA, or a taxable brokerage account. Traditional IRAs are less appealing for short-term investing because there are tax penalties when you withdraw from the account before age 59 and a half.

Unlike traditional IRAs, Roth IRA contributions can be withdrawn at any time and for any reason without taxes or penalties. That makes a Roth IRA a perfect ''multitasking'' account for younger investors who need to build up both an emergency fund and retirement assets. Roth IRAs also allow you to withdraw up to $10,000 of earnings (in addition to any contributions) to help pay for a down payment on a first home if the account has been open for at least five years.

Finding the right investments to meet near-term goals

Unlike a long-term portfolio, which has a timeline of 10-plus years, the main goal of a short-term portfolio should be to outpace inflation while protecting what you've saved. Maximizing portfolio growth is less of a priority because the added risk likely isn't worth the reward. Being able to buy a home in three years feels very different from affording it in seven because your investments lost value in the interim.

Common mistakes that investors make are either in taking on too much risk or not enough. Some investors might assume that because stocks have beaten other asset classes over long time periods, they're also a good choice for the short term—but they aren't.

Other investors might stick with guaranteed products, like CDs or money market accounts, because they're concerned about protecting their savings. This approach leaves them at a disadvantage because inflation will eat into the value of those savings. Holding cash-type investments is a good idea if your timeline is super short—less than two years.

Short-term investment portfolio examples

Explore model portfolios that show what reasonable short-term portfolios look like. The portfolios consist of cash and shorter-term bonds. You might include a dash of stocks for growth potential, but the bulk of your money for short-term goals should be in safer, lower-returning assets.

___

This article was provided to The Associated Press by Morningstar. For more personal finance content, go to  https://www.morningstar.com/personal-finance

Margaret Giles is a senior editor of content development at Morningstar.