A lot of people hate the idea of keeping money in a savings account. They feel like it’s just sitting there, earning next to nothing, and that they’re missing out on getting better returns elsewhere.

Have you ever felt like that?

It’s a feeling that makes a lot of sense. After all, there really IS no reason to settle for worse returns when you could be doing better elsewhere. A better return means you reach your goals faster, and isn’t that the entire point of saving money?

Of course it is. But there’s always a trade-off.

Investing makes a ton of sense for long-term goals like financial independence because the downside is minimal and the upside is large. If you do the hard work of sticking with your plan through the ups and downs, you’re likely to come out ahead.

But it’s a lot murkier when you look at short-term financial goals, like the house down payment you’d like to make in a couple of years or the emergency savings you might need at any moment. Does investing make sense in those situations? How can you get reasonable returns without sacrificing the goals you want to reach?

Here’s my take.

Three Reasons Not to Invest Short-Term Savings

In most cases, a simple savings account or CD is the best short-term investment for money you’ll need within the next three years.

I know, I know. It’s not exciting, it’s not sexy, and it certainly won’t make you rich. There are three good reasons why short-term investments just aren’t worth it when your timeline is so short.

1. There’s Too Much Uncertainty

The big trade-off with investing is the uncertainty. Sure, you may find yourself up 10% for the year, but you could just as easily find yourself down 20% or more. And since you have no control over that timing, it’s very hard to make any definitive short-term plans. What if the stock market plummets a few months before you want to buy your house? What do you do then?

With a savings account, you know exactly how much you need to save and when you’ll reach your goal. You also know that the money will definitely be there when you need it. It makes planning your life easy and certain.

2. The Difference Isn’t as Big as You Think

Over short time periods, the amount you save matters MUCH more than the return you get. Even big differences in return likely won’t matter all that much.

Let’s say that you want $24,000 for a down payment on a house that you’d like to buy in two years. If you save $1,000 per month and earn 1% in a savings account vs. 8% in an investment account, after two years you’ll have:

$24,231.41 in the savings account

$25,933.19 in the investment account

That’s a difference of about $1,700. Or to look at it another way, you could save $65 less per month and still reach your goal if you get an 8% return instead of a 1% return. But there are a few words of caution:

If you really need the extra $1,700, you could guarantee it by contributing an extra $70 per month to the savings account. If you save less each month and/or save for a shorter period of time, the difference between the two returns will be smaller. That 8% return is not guaranteed. You could actually end up with less money from investing if the market takes a tumble right when you need to withdraw those funds.

The bottom line is this: Yes, investing gives you the chance to have more money at the end of it. But we’re not talking about being rich versus being poor. We’re talking about fairly small differences relative to your financial goals.

3. You Can Avoid the Emotional Roller Coaster

It’s one thing to look at the numbers and think to yourself that the downside is worth the upside, but actually experiencing the ups and downs of investing is a whole other thing.

How will you feel if the stock market tanks and you see your down payment fund cut in half — potential postponing your dream of home ownership for years? What if your emergency fund suddenly loses $4,000 at a time when you’re feeling uncertain about your current job stability?

Remember, a better return isn’t the goal. The real goals are the things you want to do with your life, and investing means that you’ll constantly be worrying about whether or not you’ll be able to do them.

When Short-Term Investments Make Sense

With all of that said, it’s not like investing is bad. Investing is a fantastic tool in the right situations, and here are two cases where it can make a lot of sense to invest your short-term savings.

1. Your Timeline Is Flexible

Maybe you’d like to buy a house in two years — but it’s not a big deal if you have to wait three years. If your timeline is flexible and you’re okay with the possibility of having to wait longer to reach your goal, then the potential upside of investing may be worthwhile.

2. You Have More in Savings Than You Need

Let’s say that you need $30,000 to equal a six-month emergency fund, and you have $60,000 saved. In that case, you could invest the money, hope for a better return, and still likely have enough money in your account even if the stock market tanked right when you needed it.

In other words, if you can afford to lose a significant amount of your savings and still be on track for your goals, then the upside of investing may be worth it.

What Are You Saving For?

Whenever you’re making a decision like this, it’s helpful to step back and remind yourself of the specific outcome you’re actually hoping for.

In this case, you’re saving for a specific personal goal because you feel like it will improve your life in some way. THAT’S the outcome you’re looking for. The return you get is only relevant to the extent that it helps you achieve that goal.

Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.

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