How to invest for short-term vs. long-term goals

Investing is generally agreed upon as a staple for building wealth. But for it to dovetail with your personal financial goals, there is more finesse required than simply picking a promising opportunity to put your money into.

Alongside your tolerance for taking on risk, another major consideration when investing is what is known as your time horizon, or the amount of time in which "you will need to access your money," said Investopedia. If you are like most people, you probably have a mix of goals coming up sooner, such as a planned home improvement project, in addition to those that are a while down the road, like saving for eventual retirement. While investing can be key to meeting both of these aims, the approach you take will likely be different.

Why does your timeline matter when investing?

Above all else, "your investing time horizon will help determine what you invest in and how," said The Motley Fool. That is because the "risks you take with your money depend greatly on how much time remains for your portfolio to recover if something unforeseen happens in the economy or the stock market."

The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Think about it this way: "When you invest for the short term, you'll need access to your money sooner, which means it's best to choose less risky investments," said Experian. "Conversely, when investing for the long term, your money has more time to recover from losses and to take advantage of growth in the stock market," which "makes it more practical to pursue options that carry some risk."

Of course, you can also use safer investments on a longer time horizon, too, "but you miss out on a great deal of growth opportunity by being too cautious," said The Motley Fool. That is why "there's always a balance between risk and investing time horizon, and it's different for everyone."

What are examples of short-term investments?

With short-term investments, because you are "saving for an objective that you need to meet relatively quickly, such as a vacation, a down payment on a car or buying a new television, you can't lock your money up into investments with long-term maturities, nor do you want to invest in the stock market, which can be volatile," said Investopedia.

Keeping that in mind, here are some investments you may want to consider for short-term goals:

• High-yield savings accounts
• Certificates of deposit (CDs)
• Money market accounts
• Cash management accounts
• Treasury bills
• Short-dated government bonds

How might you invest for the long-term?

When investing long-term, you should "invest with growth in mind, not the day-to-day fluctuations in the market," said Investopedia. You will "want investments allocated across different asset classes," though "your exact mix of investments will be dependent upon your time horizon and risk tolerance."

Some examples of investments appropriate for the long-term include:

• Stocks
• Longer maturity bonds
• Exchange-traded funds (ETFs)
• Mutual funds
• Retirement accounts, like 401(k) plans and individual retirement accounts (IRAs)