This question was posted in our HTM Facebook group, from Alex…
“I want to start saving for a car purchase I will make in the next 3 – 4 years. With that timeframe I was considering a brokerage account, but what to invest in? SP500 or bonds? If bonds, which one?”
Matt & Joel’s response: This remains one of the trickiest things in personal finance. Where do you put the money you intend to spend in the “medium-term”.
Short-term is easy. Sticking money into a high-yield savings account is the answer. You get instant access, no risk, and a bit of interest in the meantime.
Long-term is a fairly easy answer too. Stock-heavy low-cost index investing in tax-advantaged accounts is a no-brainer. It gives you the most growth and compounding ability over time.
But that 3-5 year window is always the most fraught. If you invest, you might lose a chunk of that capital right before you need to make a purchase. But if you sit too long in cash and the market rallies, you might miss out on meaningful gains.
While there’s no slam-dunk answer, we’ll try to thread this needle deftly…
Holding Cash in a HYSA
One of the best options for saving for a car purchase is keeping your nest egg in cash. And that’s mostly because of the current interest rate climate.
We’re finally in the ‘savers aren’t getting bludgeoned’ phase of life, where you can make money above & beyond the rate of inflation in a simple HYSA, with no exotic moves needed. Interest rates on savings accounts are currently in the 4-5% range. With no risk!
That makes it even more difficult to justify investing the money in an attempt to juice returns for an upcoming car purchase. The risk of losing money isn’t worth the potential reward of higher returns within a few short years.
Short Term Investing
If you decide to invest, make sure you do it with your eyes wide open. There were obviously folks calling the top of the market a couple of years ago. They avoided investing – and look at what they missed out on. A huge bull market.
Don’t shy away from investing just because you think the market can’t go up anymore. It always does, it’s just a matter of time.
If you are keen to take on some additional risk and want to invest a portion of your car-buying fund, don’t go all-in on stocks! Stocks are a great place to invest money that you need decades from now, but are never great for the money you need relatively soon. That’s because the market can be incredibly volatile given a shorter time horizon.
TLDR: the reason investing might not make sense in this situation is that you need those dollars sooner rather than later.
Target Date Funds
If you do want to invest, a good option might actually be a target date fund (TDF). You can do this in a regular brokerage account.
Just pick one closest, not to the date of your retirement, but to the date when you’ll need to spend the money.
For example, a TDF 2025 or 2030 maybe! These funds are invested conservatively because they are built for people retiring in the next few years.
Still, even that might be needlessly overcomplicating things. Honestly, the rates on a HYSA or short-term CD might be equal to how a TDF performs in just a few years.
Lastly, if you’re worried about rates going down for your HYSA in the next couple of years, consider a CD where you can lock in a rate for longer.
The Bottom Line:
Given your relatively short time frame, and the current favorable interest rates for saving, opening a HYSA is likely the best route to go. It’s simple, there’s no gamble or risk, and you can still get a good return that beats inflation right now.
If your time frame is on the longer end, say 5-10+ years, investing becomes a more serious consideration. Taking that additional risk is more justified given the higher likelihood of positive growth over a decade of investing.
For the full version of this discussion, check out Podcast Episode #862 (it’s the very last question in the episode)
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