Short-Term Goal Funding Plans

Definition and Key Concepts

Short-term goal funding refers to the systematic accumulation of capital for specific financial objectives with time horizons between 1 and 5 years. These goals require different investment vehicles than long-term retirement savings because the shorter time frame limits recovery time from market losses.

Characteristics of short-term goals:

Common short-term goals with typical funding requirements:

The primary risk for short-term goals is needing funds during a market downturn. A portfolio with 60% equity exposure can decline 30%+ during recessions. A $50,000 home down payment saved over 3 years would have been worth $35,000 in March 2020 if invested in stocks, potentially derailing the purchase entirely.

Appropriate Funding Vehicles

High-Yield Savings Accounts (HYSA)

Current rates (December 2024): 4.00-5.00% APY at online banks FDIC insurance: Up to $250,000 per depositor, per institution Liquidity: Same-day to 1-2 business days for transfers Minimum balance: Typically $0-$100

Best for: Goals within 12 months, emergency funds, amounts under $250,000

Rate comparison by institution type:

The rate differential between online and traditional banks is substantial. On a $30,000 balance over 2 years:

• Online bank at 4.50% APY: $2,791 in interest
• Traditional bank at 0.10% APY: $60 in interest
• Difference: $2,731

Certificates of Deposit (CDs)

Current rates (December 2024):

FDIC insurance: Up to $250,000 per depositor, per institution Liquidity: Penalty for early withdrawal (typically 3-12 months of interest) Minimum deposit: $500-$1,000 at most institutions

Best for: Goals with fixed dates 6+ months away, funds not needed for emergencies

CD ladder strategy: For a $24,000 down payment needed in 2 years:

• Deposit $6,000 in 6-month CD
• Deposit $6,000 in 12-month CD
• Deposit $6,000 in 18-month CD
• Deposit $6,000 in 24-month CD

As each CD matures, either reinvest or hold in HYSA if goal date approaches. This provides quarterly liquidity access while capturing higher rates than savings accounts.

I-Bonds (Series I Savings Bonds)

Current rate (November 2024 - April 2025): 3.11% composite rate (1.20% fixed + variable inflation component) Purchase limit: $10,000 per person per calendar year (electronic) + $5,000 via tax refund Minimum holding period: 12 months (penalty-free after 5 years) Early withdrawal penalty: 3 months of interest if redeemed before 5 years

Best for: Goals 1-5 years away, inflation protection, amounts up to $10,000/year

I-Bond mechanics:

• Fixed rate component: Set at purchase, never changes
• Inflation rate component: Resets every 6 months based on CPI-U
• Composite rate: Fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)

Tax advantages: Interest exempt from state and local income tax; federal tax deferred until redemption or maturity (30 years)

Treasury Bills (T-Bills)

Current rates (December 2024):

Purchase method: TreasuryDirect.gov or through brokerage accounts Minimum purchase: $100 Liquidity: Can sell before maturity in secondary market (brokerage accounts)

Best for: Goals 3-12 months away, amounts above FDIC limits, state tax savings

Tax advantage: Interest exempt from state and local income tax

Money Market Funds

Current rates (December 2024): 4.50-5.20% 7-day SEC yield Insurance: Not FDIC insured (but invest in very low-risk securities) Liquidity: Same-day or next-day

Best for: Amounts above FDIC limits, brokerage account cash holdings

Types of money market funds:

Worked Example: Home Down Payment in 36 Months

Goal: $60,000 down payment for home purchase Timeline: 36 months Current savings: $0 Required monthly savings: Approximately $1,550/month

Funding strategy using multiple vehicles:

Months 1-12: Build HYSA base

• Deposit $1,550/month into HYSA at 4.50% APY
• Year-end balance: $19,118 (includes $518 interest)
• Rationale: Maintain full liquidity while rates remain high

Months 13-24: Add CD ladder

• Continue $1,550/month to HYSA
• At month 13, move $15,000 to 12-month CD at 4.75% APY
• Year-end balance: $38,950 (HYSA: $23,238, CD: $15,712)
• Rationale: Lock in rate on funds not needed for 12+ months

Months 25-36: Consolidate for closing

• Continue $1,550/month to HYSA
• Month 25: CD matures, deposit to HYSA ($15,712)
• Maintain full liquidity for closing costs flexibility
• Final balance: $61,200

Total interest earned over 36 months: $4,800 Versus traditional savings at 0.10% APY: $90 Benefit of optimized strategy: $4,710 additional toward down payment

Alternative allocation if I-Bonds purchased:

• Year 1: $10,000 to I-Bonds (each spouse), $8,600 to HYSA
• Year 2: $10,000 to I-Bonds (each spouse), $8,600 to HYSA
• Year 3: $18,600 to HYSA (I-Bonds past 12-month minimum)
• Benefit: Inflation protection and state tax savings

Vehicle Selection Framework

Time Horizon Decision Tree

0-6 months to goal:

• Primary vehicle: HYSA only
• Rationale: Maximum liquidity, no early withdrawal risk

6-12 months to goal:

• Primary vehicle: HYSA + short-term CDs (3-6 month)
• Rationale: Slightly higher yield with predictable maturity

12-24 months to goal:

• Primary vehicle: CD ladder + HYSA buffer (20% in HYSA)
• Consider: I-Bonds if purchased 12+ months ago
• Rationale: Balance yield optimization with liquidity needs

24-60 months to goal:

• Primary vehicle: I-Bonds (up to annual limit) + CD ladder
• HYSA buffer: 10-15% of target amount
• Rationale: Inflation protection becomes valuable over longer horizons

Risk Tolerance Adjustments

Conservative approach (0% equity):

• Use only FDIC-insured or Treasury-backed vehicles
• Accept lower returns for guaranteed principal
• Appropriate for: Non-negotiable deadlines (home closing, tuition due date)

Moderate approach (10-20% equity):

• 80-90% in HYSA/CDs/I-Bonds
• 10-20% in short-term bond fund or balanced fund
• Accept small principal fluctuation for potential higher return
• Appropriate for: Flexible deadlines (vacation, vehicle upgrade)

Equity allocation in short-term accounts is generally not recommended. A 20% equity allocation can decline 10% in a single month, potentially reducing $50,000 to $49,000 in bond losses and $47,000 in stock losses during market stress.

Rate Environment Considerations

Rising Rate Environment

• Favor shorter-term CDs (3-6 months) to capture higher rates at renewal
• Avoid long-term CDs that lock in lower rates
• HYSA rates typically adjust upward with 1-2 month lag

Falling Rate Environment

• Consider longer-term CDs (12-24 months) to lock in current rates
• I-Bond fixed rate becomes more valuable (locked at purchase)
• Expect HYSA rates to decline within 1-2 months of Fed cuts

Current Environment (December 2024)

Fed funds rate at 4.25-4.50% with expectations of gradual cuts through 2025. Consider:

• Locking in 12-month CDs at current rates
• Maximizing I-Bond purchases while fixed rate component is positive
• Maintaining HYSA for liquidity while rates remain elevated

Checklist: Short-Term Goal Funding

• Define specific goal amount and target date
• Calculate required monthly savings (goal / months, adjusted for expected interest)
• Open HYSA at online bank offering top-tier rates (currently 4.5%+ APY)
• Purchase I-Bonds annually if goal is 12+ months away (up to $10,000/person)
• Build CD ladder for portions not needed for 6+ months
• Review rates quarterly and reallocate as CDs mature