We all have financial goals — sometimes they’re shorter-term things like buying a car, and sometimes they’re longer-term like saving for a child’s education or our own retirement. But how do we meet both without sacrificing one or the other? Can we still achieve our long-term goals while also satisfying short-term needs? Here’s how.
How to Satisfy Both Short-Term Financial Goals and Long-Term Goals
In a perfect world, we’d all put our investible funds in a diversified investment account and continue to build those assets by methodically contributing as much as we can for the next several decades. If we all follow this blueprint, our significant financial decisions will be about maximizing our returns in varying market environments, keeping risks within our comfort zone, and managing related taxes. Then—voila—we’ll all likely have a tidy nest egg to fund our futures.
If only it was that simple.
During those “several decades” while you are saving for your future, life happens. And investment decisions become a bit more complicated. For example, you need a down payment for a house; funds to purchase a new car; or money to cover a surprise expense, such as dental surgery or another medical procedure.
So how do we balance these shorter-term needs with our longer-term goals that investing will probably be the best tool to help us achieve?
Goal Setting for Short-term Versus Long-term Savings
These competing short and long-term goals require some additional thinking about the best positioning of your investible assets. When parsing out how to balance your short- and long-term savings goals, the first questions to ask yourself are these: What specific shorter-term goals are you trying to achieve, and when will you need the money?
There is no one-size-fits-all answer because in addition to the nearly unlimited things people save for in the short-term, there are also several variables beyond when you need the money. For example, you should also ask yourself about the flexibility of your timeline, your risk tolerance and even the urgency or importance of your goal.
Let’s use a down payment for a home as an example. How much do you need? Let’s assume $100,000. When do you need it? We’ll say five years. Is homeownership an urgent or important goal at this point in your life? Maybe, maybe not, or maybe you need to adjust the amount. But your answers to these questions will determine not only how much you need to save and when, but also how much risk you can take with the money in order to meet your timeline. These are decisions that you, with the help of a financial advisor, can determine based on your personal circumstances.
Once you’ve clearly identified a realistic goal and determined the amount, timeline, and urgency of the goal, the next step is deciding where to put your money to maximize its value while you work toward realizing your goal. There are no hard guidelines here, either, so a financial advisor’s input can be invaluable.
General Guidelines Based On When You Will Need Your Funds
You’re probably asking yourself: What actually constitutes a short-term goal? How short is short-term?
We generally consider a short-term goal to be something that you will need money for in less than 18 months. Here’s how we recommend allocating savings for a short-term goal:
If you need the funds in less than 18 months: Consider a secure, liquid cash account to keep your money FDIC insured and readily available to meet your goal. Personal Capital Cash™ is a great option; it offers competitive FDIC insurance and flexible withdrawals and deposits.
We usually say that something you’ll need funds for in 18 to 36 months is a “mid-term” goal.
If you need the funds in 18 months to 36 months: Your decision may vary depending on how much of your net worth the goal amount represents.
- If the amount is less than 10% of your net worth, your most effective course will likely be keeping your money invested with your current strategy, or a slightly less aggressive strategy for some investors or goals.
- If the amount represents more than 10% of your net worth and your timeline is inflexible, consider a high-yield savings account to keep the funds protected and readily available.
Anything that won’t require cash for more than 36 months is generally what we consider a long-term saving goal. Here’s what we recommend.
You won’t need access to the funds for more than 36 months: Again, your decision may vary depending on the goal amount’s impact to your net worth.
- If the amount is less than 10% of your net worth, your most effective course will likely be keeping your money invested in accordance with your current investment strategy.
- If the amount represents more than 10% of your net worth, you may want to consider moving the funds to a more conservative long-term investment strategy, particularly if your current investment style is aggressive. If you have some flexibility in the timeline, however, you may just want to stick with your current investment strategy.
Personal Capital Tip: We usually recommend that you keep between 3- and 6-months’ worth of living expenses in cash as an emergency fund. It’s important to have funds readily available if you need them in the event of a job loss, major medical expense, or other emergency situation. But don’t let your cash languish in a traditional saving or checking account – put it to work in a high-interest account so you’re still earning on the money you have stashed away for emergencies. Learn more >>
The Bottom Line
While these guidelines are helpful, it really all depends on you.
I wish I could give you iron-clad advice here, but one-size-fits-all guidance rarely actually works when it comes to investing and personal finance. So, remember to ask yourself about the urgency of your goal, what your timeline is, and how all that jives with your investing style. For example, how inflexible is your goal? In the example we used earlier – the down payment — is it a “must” to be in a house within five years, or could you wait longer? What is your risk tolerance? If you keep your goal money invested long-term, will you fret every time the market takes a turn?
Now weigh those variables against how your decision will impact your ability to complete your goal. For example, putting funds that won’t be needed for more than 36 months in a savings account may feel safe, but it is likely counterproductive because of the opportunity costs. Your money won’t be growing much while you wait to spend it. Will forgoing potential returns on your money delay your goal?
For most investors and for many goals with a mid- and long-term time horizon, it’s probably worth the risk to maintain a long-term investment approach so that you can benefit from the better return potential. Your advisor can help you clarify your personal risk tolerance and the best place to park funds for your different financial goals so you can comfortably work towards them — whether they be shorter or longer term.
- See all of your accounts in one place
- Analyze your investments and uncover hidden fees,
- Budget for short-term goals, like an upcoming vacation
- Plan for long-term goals, like saving for retirement