Capital preservation is key for short-term goals

Where to park $10,000 now for the short-term

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From the December 2014 issue of the magazine.

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(ImagesBazaar/Getty Images)

(ImagesBazaar/Getty Images)

Q: My son is attending university next fall. He has saved $10,000 but the money has been sitting in a savings account, earning no interest. Would it be prudent to place it into a TFSA, then invest in an ETF, mutual fund or a stock? We’ll need the money in approximately 12 months and we hate to see it sit that long without accumulating a return. —Marlow Gingerich, Stratford, Ont.

A: Nope. It wouldn’t be prudent. I totally understand why you’d like to get that money working for your son, but it isn’t a good idea here because his money is for a very clear and immediate purpose—school in 12 months. In this case, capital preservation should be the goal.

Besides, investing the money simply isn’t worth the risk. Here’s an example: If the stock market moves in your favour, the ETF or mutual fund might earn 5% after fees. That’s a $500 gain. A high-interest savings account would earn 2%, bringing in $200 guaranteed. Why take that big a risk for a $300 reward? Instead, help him find the best rate on a savings account and then invest your time teaching him the basics of budgeting—that will give you a big reward with zero risk.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal finance question? Write to us at ask@moneysense.ca

 

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