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150421 Saving For a Short Term Goal

Saving For a Short Term Financial Goal: Should You YOLO It Into the Stock Market?

profileJoel Koh

Like many things in life, you need to find the right tool for the job.

This wisdom applies to saving for your financial goals as well.

For example, you might want to save for retirement that is a few decades away, you will want to take on a bit more investment risk as you have a medium to long investment horizon.

In other words, you have the holding power to wait for the stock market to recover after a pullback which may take months or years to do so.

But if you are saving for a short term goal like saving for your wedding, home renovation, a car, or your first home, etc. you don’t want to be forced to sell your investments in the midst of a market pullback and realise your losses.

Thus, preserving the money invested should be your top priority when it comes to saving for a short term goal. This means that you probably shouldn’t be risking it by throwing your money into the stock market.

You will also have to adjust your expectations on investment returns as you won’t be getting anywhere near the 7-8 per cent per annum (p.a.) returns you might get from investing in something like a low-cost index fund.

Another important thing to take note of is that you will want to find a short-term investment product with high liquidity so that you will not be penalised heavily if you withdraw your money earlier.

And you won’t want to put your money in a bank account with low-interest rates either as inflation will eat away at it.

With that in mind, here’s how you should save and invest for a short term financial goal that is months or years away.

FYI: We are defining short term goals as anything with a time horizon of fewer than five years while the goals above five years can be considered medium- to long-term goals.


TL;DR: How to Save For a Short-Term Goal

  • When saving for a short-term goal, you should avoid riskier long-term investments like stocks that are more volatile.
  • Your priority when it comes to saving and investing for a short term goal should be capital preservation over chasing high returns.
  • Options to consider include:
    • High-Interest Rate Savings Accounts: (0.40%-1.30% p.a.)
    • Insurance Savings Plans: (~1.40% p.a.)
    • Short-Term Endowment Plans:(1.55% p.a.)
    • Cash Management Accounts: (0.30% – 1.50% p.a.)

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Seedly. Investors should always do their due diligence before investing in any investment products or adopting any investment strategies.


How Long Does The Stock Market Take to Recover?

Before we begin, it is important for you to know why you should not be taking more investment risk when saving and investing for a short-term financial goal.

As the saying goes, hindsight is 20/20. Although we can easily identify stock market pullbacks in hindsight, predicting when a stock market pullback will happen reliably is next to impossible.

But even though past performance is not indicative of future returns, we can analyse the history of market pullbacks in the S&P 500 Index from World War II till 31 December 2021 to gain some valuable insight.

FYI: The S&P 500 index (or Standard & Poor’s 500 Index) includes 500 of the top US companies in leading industries and is considered to be an excellent proxy to the US stock market performance.

The Deeper the Stock Market Decline, the Longer the Recovery
Declines in the S&P 500® (31/12/1945 - 31/12/2020)
Decline %Number of DeclinesAverage Decline %Average Length of Decline in MonthsAverage Time to Recover in Months
5-1084-711
10-2029-1444
20-409-281114
40+3-512358

Source: Guggenheim Investments

Here are a few key points from the data (via Guggenheim Investments):

  1. The majority of stock market pullbacks are between 5-10 per cent and take on average about one month to recover.
  2. Whereas 10-20 per cent stock market pullbacks take about four months on average to recover.
  3. Even stock market pullbacks of 20-40 per cent take only about one year and two months to recover.
  4. But, stock market pullbacks of 40 per cent and above take four years and 10 months to recover. These pullbacks mainly occur during economic recessions.

From the data above, you can see why it can be problematic if you take the money you need for a short term goal and invest in the stock market.

For example, you might be shopping for an HDB resale flat and plan to buy it in a year’s time.

For some reason or another, you decided to put the money you set aside for a downpayment into the stock market.

But, halfway through, you may have found the dream HDB resale flat of your dreams and want to make the downpayment for it.

There’s a chance that your stock investment may be in the red due to a stock market pullback and you might have to actualise the losses to pay for the downpayment since you need the money now.

Source: Giphy

Keep it Safe

When saving and investing for your short term financial goal, making money should not be the main priority.

Rather, you should focus on preserving your capital and slowly accumulate the funds to achieve your short term goal.

Source: Giphy

Although this may sound a bit boring, you need to manage your expectations on how much returns you can get in this low-interest-rate environment.

If you cannot meet your short term financial goal without the investment returns, you should probably reevaluate your short term financial goal and adjust the timeline.

Perhaps you might even want to take up a side hustle and earn more instead.

Here are some options you can consider.

Where Can Park Your Money For a Short Term Financial Goal

So where can you park your money?

Here are a few things to consider.

You should do your due diligence on these investment products, but don’t spend too long as it will limit the investment returns you can get.

You will also need to ensure that you can easily withdraw the money during an emergency and avoid those investment products that impose hefty penalties for early withdrawal.

Also, another thing to be cautious about is if the investment product is promising a high-interest rate (>5% p.a.) which may be too good to be true in our low-interest rate environment.

As such, there might be more underlying investment risk in the investment product that you should scrutinise more to uncover.

With that out of the way, here are some options you can consider.

1. High-Interest Rate Savings Accounts (0.40%-1.30% p.a.)

Unfortunately in our low-interest rate environment, high may be a bit of a misnomer.

Pros

Although the returns may be low, these savings accounts are amongst the safest option for you to park your money for a short-term savings goal.

This is because if your savings accounts is with a Deposit Insurance (DI) Scheme member bank or finance company, your deposits with that member are aggregated and insured up to $75,000 by the Singapore Deposit Insurance Corporation Limited (SDIC) in the event that the bank fails.

Liquidity is also great as you can withdraw the money almost instantly.

Cons

However, the returns from these accounts are rather low in general and you will have to jump through a lot of hoops to get a higher interest rate.

Realistically, you are looking at interest rates of about 0.4-1.3% for these accounts.

Wondering which one is the best for you? Why not use our savings account calculator to find out!

2. Insurance Savings Plans (~1.40% p.a.)

Alternatively, you might want to look at insurance savings plans.

Pros

These plans are basically an insurance policy that combines the features of a regular savings plan, insurance protection, and a traditional bank account.

More specifically, I’m referring to Dash PET, Dash EasyEarn, GIGANTIQ, and the Singlife Account.

All of which are universal life plans that offer an attractive rate of return on the money you put into the account.

And they also provide a bit of insurance coverage too.

One of the good thing about these insurance savings plans is the fact that they have an attractive rate of return, no lock-in period, and are capital guaranteed.

But sadly at the time of writing (15 April 2021), you can only sign up for Dash PET as Etiqa and Signlife are not accepting new sign-ups for Dash Easy Earn, GIGANTIQ and the Singlife account.

For Dash Pet, you get to enjoy 1.7 per cent p.a. on the first $10,000 in the account for the first year and 1.2 per cent p.a. for the next $20,000.

This will give you a blended interest rate of ~1.38 per cent p.a. for the first $30,000 in the account.

Cons

The only con I can think of is there is a cap on the amount that enjoys interest in the account.

3. Short-Term Endowment Plans (1.55% p.a.)

Another low-risk investment product to consider are the short-term endowment plans that are released in tranches throughout the year.

The good thing about these types of investment products is that the return is usually guaranteed.

However, the main drawback of these endowment plans is that you are required to lock in your money for a period of time.

But remember, you know your own situation the best, so plan ahead and make sure your cash flow works!

An example of this would be the recently launched Great Eastern Great SP Series 3 Endowment Plan.

4. Cash Management Accounts (0.30% – 1.50% p.a.)

Next up we have cash management accounts, an investment product with underlying investments like cash funds, money market funds (MMF) and short-duration bond funds which have varying risk levels.

Cons

These are lower-risk investments but you can still lose money and have to contend with some volatility as well.

An important thing to note is that these cash management accounts are investment products, which means your capital is not guaranteed by Singapore Deposit Insurance Corporation (SDIC).

Pros

But on balance, they still offer decent returns and are safer than assets classes like equity.

These cash management accounts are also rather liquid as withdrawal times range anywhere from 1 – 6 business days.

For more on cash management accounts, you can read our comparison above!

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About Joel Koh
History student turned writer at Seedly. Before you ask, not a teacher. I hope to help people make better financial decisions and not let money control them.
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