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 – http://www.peoplestrust.com/main/?en&tax_free_saving_account

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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18 Comments

  1. Hannah on August 19, 2013 at 5:38 am

    ING savings account is giving 2 1/2 percent right now. If you run out of TFSA room you can park the rest there. Easily accessible.

  2. William on August 19, 2013 at 6:05 am

    My Investment Savings Account at ING pays 1.35%, not 2.5%. Even the TFSA is 1.4%. I moved my TFSA to Peoples Trust about 6 months ago for this reason. How do you get 2.5%?

    • Hannah on August 19, 2013 at 6:18 am

      My Edward Jones financial planner sent me a “promotion”, sent to him by ING. If I use it I get $25 to put in my account, and 2 1/2 % interest. My TFSA’s are a little higher than yours also. They are with Edward Jones also.

    • Echo on August 19, 2013 at 6:30 am

      @William – This is a short term promotion that ING offered over the summer. The rate goes back to 1.35% after August 31.

      http://www.ingdirect.ca/referafriend/

      • Hannah on August 19, 2013 at 6:59 am

        Yeah, I just reread the promotion. It is only good for 90 days. But it still gives me twenty five dollars to try it. Maybe this time I will take my money out of RBC with its pathetic interest and move it. But for some reason “virtual banking” scares me. Can you reassure me??

        • Echo on August 19, 2013 at 7:22 am

          @Hannah – I’d say if you’re already comfortable banking at an online bank like ING then you shouldn’t have an issue with Peoples Trust. The key is your deposits are CDIC insured – you can read more about that here – http://www.cdic.ca

  3. CanadianDaniel on August 19, 2013 at 6:33 am

    I was going to point out that a dividend stock like LightStream Resources (LTS) pays a 12% dividend — but it certainly can’t pass the “riskless” test. A lesson I learned the hard (and painful way) back in 2009!

  4. fiscally fit on August 19, 2013 at 10:24 am

    if the dollars are non registered, an Accumulation Annuity might work. GIC and AA rates are virtually the same and this way you could attach a named beneficiary and the dollars wouldn’t be locked in. Also, has anyone actually got the 3%? Because if so, that would be amazing haha

    • Echo on August 19, 2013 at 10:45 am

      @fiscally fit – I’m not sure an Accumulation Annuity would be appropriate for short term investing with a relatively unknown withdrawal date. From my brief look at these products it looks like you may be charged a fee for early redemption.

      Other red flags – Two pages of terms explaining how the product works, along with a “contact us” for our current interest rate. No thanks.

      • fiscally fit on August 19, 2013 at 12:31 pm

        Most AAs have no penalty for early withdrawal. If a GIC is a good fit, a AA is a good fit too. Basically the insurance industries solution to a GIC (brother from another mother haha). Let the banks and insurance companies fight for business!

        I think many people truly discount the fact that your personal investing time horizon is extremely important. If you need the money in the next two years, most people really shouldn’t be doing any market based investing.

  5. Sandi Martin on August 19, 2013 at 11:31 am

    I couldn’t agree more, Robb. As disheartening as it seems to “miss out” on market returns – especially if you’re saving a large downpayment – it would be doubly (triply? quadruply?) so to lose a third of the value of your savings just as the perfect house at the perfect price comes onto the market.

    Only one further clarification on TFSA rules: contribution room can be re-used only in the next calendar year after you withdraw. So deposit $5,500 in January 2013, withdraw $500 in June 2013, and you have to wait until January 2014 before that $500 becomes available to recontribute. Old news, I’m sure.

    • Echo on August 19, 2013 at 12:21 pm

      @Sandi – Thank you for adding that very important point about TFSAs.

      You’re right; it’s the misguided fear of missing out on higher returns that often shifts people away from guaranteed savings vehicles.

  6. Brett @ wstreetstocks on August 20, 2013 at 12:20 am

    Nice article Robb. There are situations where short term investing offers potentially better rewards. Nice breakdown.

  7. Robin on August 20, 2013 at 4:52 am

    I have noticed that people are extremely confused regarding TFSA “rules”. I believe it would be a very useful subject to really clear up those rules, as Sandi Martin explained, and to make sure your readers understand the ins and outs of TFSAs.
    I have heard that even tellers at banks are confused!

    • fiscally fit on August 20, 2013 at 1:59 pm

      Agreed, many people have not even heard about the calendar year rule…

  8. My Own Advisor on August 20, 2013 at 3:55 pm

    I like using our PC Interest Plus account for short term savings. This account also doubles as a travel fund for us.

    Mark

  9. Anton Ivanov on August 26, 2013 at 6:39 pm

    Short-term bond funds can also be an option for some investors. Their returns are a little higher than the current savings account yields (low single digits) and the risks are fairly low.

    • Sandi on August 26, 2013 at 6:52 pm

      “Fairly low”, yes, but not zero. I’d be very careful putting any money meant for a short term (important) purchase into short term bond funds. Not only is there a very real risk of losing money (even a small amount), they also come with account fees and commissions to buy or sell or both, expenses not present in GIC or cash parking.

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