Appropriate Investments for Major Purchases

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Appropriate Investments for Major Purchases

Especially if you don’t have a high tolerance for risk, certificates of deposit or money market funds are good savings vehicles for major purchases. A money market fund invests in low-risk securities such as Treasury bills. These funds are managed to provide a low return, but more importantly, to maintain a stable value.

Because money market funds are highly liquid (meaning they can be converted to cash quickly without investment), they are also well-suited for your emergency fund. After all, when you need money in a pinch, you must access it without regard for prevailing conditions in the financial markets that day.

When income investments make sense

Income investments are a reasonable alternative to money market funds in saving for a major purchase. They provide steady interest or dividend payments. (Interest is paid on debt investments such as bonds. Dividends come from the earnings that equity or mutual fund investments make.)

The most well-known advantage is that the income investor—unlike the growth investor—receives money now. Because of the regular income stream, the underlying value of an income investment will tend to be less volatile than a growth investment.

When growth investments make sense

When the time horizon for your planned major purchase is long enough, growth-oriented investments might be more appropriate than money market funds or other short-term investments. Growth investments, including many stocks and mutual funds, and sometimes real estate, are commonly used for long-term savings. Market ups and down have historically tended to smooth out over the long term, providing more growth than conservative investments.

Growth investments carry the potential for higher returns, but there is a higher risk that their value will drop during any given short period. Therefore, they are not the best choice for your emergency fund or for major purchases you plan for the short term.