Interest rates on savings accounts and GICs are abysmal these days, so it can be tempting to plow all your hard earned savings into the stock market for a chance to juice your returns.  But how you save and invest depends a lot on your time horizon – when will you need the money?

No matter your age and stage of life, you’re bound to have a mix of short and long term financial goals.  There’s no question that for long term goals, like retirement, you’re better off in the market.  Canadian and U.S. stocks have returned roughly 10 percent per year from 1935 to 2013.

Related: The Big Picture Investing Chart

But the stock market is no place for short term savers.  If you’ll need the money in less than five years then safety should be your chief concern.

Need some proof?  Check out the investing chart linked above and note the 43 percent drops in 2000-2002 and 2008-2009.  Time it wrong and your down payment nearly gets cut in half!

So where should you park your savings when you’ll need the cash in a few years, or even a few months?  One of our readers, Lisa, recently sent an email and asked that very question.

Reader question: Where to invest for short term goals?

Lisa writes: “We’ve just sold our condo and are now renting for a while before we buy again.  We’ve used a portion of the sale proceeds to pay off some outstanding debt but we’ll have just over $13,000 to invest and build up to purchase our next home.

I see a lot of advice on what avenues to use for retirement savings – like index investing or dividend stocks – but what is the best product for short term goals such as saving for a down payment on a house?”

Here’s my take on Lisa’s situation:

The short answer is that you’ll want to keep this money absolutely safe.  Unfortunately, risk free investments are not paying very much today.

Related: Can You Succeed With An GIC Portfolio?

I’d recommend stashing the money inside your tax free savings account (if you have the contribution room).  The best rate I’ve seen for a high interest TFSA is at Peoples Trust in Vancouver – it pays 3 percent –

You can open an account online from anywhere in the country with a minimum $1,000 deposit.  Deposits at Peoples Trust are covered by CDIC insurance.

Some quick facts about TFSAs:

  • You can contribute up to $5,500 per year to a TFSA.
  • Any income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused contribution room is carried forward indefinitely.
  • Withdrawals can be put back into a TFSA in future years.

You can have more than one tax free savings account, so you don’t have to worry about opening an account at a different financial institution from where you normally bank.

Related: The Beginner’s Guide On How NOT To Start Investing

The nice thing about using the savings account option rather than a GIC is that you can withdraw your money any time without penalty.

Final Thoughts

When it comes to risk free returns, 3 percent is about the best you could ask for.  You can sleep easier knowing your principal investment is safe.

To be clear; investing that $13,000 in the stock market is not a good idea when you’ll need the money soon.

You don’t want to be in the unenviable position of selling your stocks at a loss when you’re ready to buy your next home.

Readers, where do you invest for your short term financial goals?

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