By Jim Kerr, CFP®

When choosing your investments, it is wise to think of your goals and how far away they are. Long-term goals are more than five years away and typically include saving for retirement or college. Short-term goals are those less than five years away and often include saving for a vacation, a down payment on a home, or a new car.

When saving for short-term goals, it is advisable to avoid stocks or stock mutual funds. While stocks have the potential for higher returns, the volatility can be a problem. For instance, if in the year 2000 you put money in the stock market for a vacation to be taken in 2002, you might have seen your investment drop by 50 percent or more due to the bear market.

There are several options that are suitable for short-term goals. Here are a few to consider:
Traditional Bank and Credit Union Savings Accounts: These are convenient, and you can withdraw money at any time without penalty. However, the interest paid is usually lower than other options.
Internet Bank Savings Account: If you are Internet savvy, these are convenient to set up. The interest paid is often much higher than that at traditional banks.
Certificates of Deposits (CDs): These are offered by most banks, and typically pay higher interest than regular savings accounts. The interest rate is guaranteed to remain level until the CD matures. If you need the money before the maturity date, there is a penalty for early withdrawal. These work well when you know exactly when you will need the money.

If you use a bank or a credit union, choose one that insures your deposits through the FDIC (for banks) or the NCUA (for credit unions). Avoid keeping any money in a bank or credit union in excess of the deposit insurance limit.
Money Market Mutual Funds are available through mutual fund companies. They often pay a higher interest rate than traditional bank savings accounts, and offer the option of check writing. While not FDIC insured, they are considered very safe.
Short-Term Bond Mutual Funds are also available through mutual fund companies.

The interest rate they pay is often even higher than a money market mutual fund, but there is some degree of risk. They are not FDIC insured. If short-term interest rates rise significantly, there is a chance that a short-term bond fund could have a negative total return for the year. This does not happen often, but it does happen occasionally.
Money market mutual funds and short-term bond mutual funds are often available in versions where the interest is taxable or tax-exempt. The tax-exempt versions can be advantageous for high-income people in the top marginal tax brackets.

These days, most banks, credit unions, and mutual fund companies offer online access to your accounts via the Internet. This is extremely convenient, but you need to be careful. Make sure you have updated anti-virus, anti-spyware, and a firewall on your computer, and keep your passwords secure.

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