Saving towards short-term goals is an important part of great financial management. Short-term savings and an emergency fund are often the last line of defense against expensive debt. However, finding a great place to grow short-term savings can be a challenge.
Savings accounts and money market instruments often don’t offer returns that keep up with inflation. That means your money can buy less from one year to the next. If you have a five-year savings goal, this could have a real impact on whether you can afford the thing you’re saving for.
The important consideration in short-term investing is the relationship between time and risk.
Certain investments are considered more risky than others because of how much their prices can move in a short time. Ordinary shares, for example, can be bought and sold at any time. The price of a share is determined by supply and demand, which is sometimes influenced by news about the company or the economy.
If all of your savings are in shares, the share price could fall the day before you need to withdraw the money. You could end up selling your investments at a loss or not achieving as much growth as you had hoped.
The more time you have, the more risk you can afford to take. If a share event affects the value of your investment, you simply stay invested until the shares recover. The idea is that a more risky investment gets rewarded with better investment returns. As you get closer to withdrawing your investment, however, your risk should decrease. The closer you get, the more of your savings should sit in cash so you’re sure the amount you need is there exactly when you need it.
In terms of risk, shares (sometimes called equities for no good reason) are the Wild West. Property is slightly less risky, but still no joke. Think of it as Brooklyn in the 70s.
Next up are bonds. They are considerably safer because you are very likely to get back at least your original investment. On top of the original investment, you’ll receive interest. In the case of total return ETFs, the interest earned on bonds is used to buy even more bonds. Think of this risk as being pick-pocketed on a vacation in Portugal.
Safest of all is cash. You have the option to just leave your cash in a fixed interest account for the duration of your investment. However, money market ETFs offer easy access and solid returns.
The below ETFs are suitable for investments of less than 10 years.
|ETF||Asset class||Investment period|
|NewFunds Mapps Protect ETF||
||8 – 10 years|
|NewFunds GOVI ETF||South African Government bonds||3 – 8 years|
|NewFunds ILBI ETF||Inflation-linked bonds||3 – 8 years|
|Ashburton Government Inflation ETF||Inflation-linked bonds||3 – 8 years|
|First Rand DCCUSD||US bonds||2 – 8 years|
|NewFunds TRACI 3 Month ETF||Money Market||0 – 3 years|
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