Defining and Investing for Short, Medium, and Long Term Personal Finance Goals

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Some goals are easy to define. Others are not so easy. After a bit of thought and number crunching, you can probably decide when you want to retire, and how much money you will need to live comfortably. Saving that much money might be harder, but once you decide how much money you will need, you now have a goal-a long term goal. But defining and saving for short or medium term goals, which I consider 0 to 5 years (short term) and especially 5 to 10 years (medium term) can be more difficult. Retirement saving has special savings vehicles you can use, such as a 401k or a Roth IRA. How do you save for short and intermediate length personal finance goals, and where do you invest the money? Some people give young(er) people the advice that they should only invest in the stock market, and CD’s or bonds should be avoided. But this is generally for retirement investing. What about saving for goals with a shorter time period?

Less than 5 years- You want to keep risk to a minimum, so a high interest savings account such as ING Direct or other very low risk savings or investment account is ideal. You may want to save up for a car, or a down payment on your house, or build up an emergency fund. Your goal here is to preserve principle, but to get the best interest rate available to you at a reputable bank or other investment company with very low risk.

5 to 10 years- Even at an intermediate length of time, consider a high interest savings account, or other low risk investment option. I bonds or CD’s can be an option, especially if your goal is education related, like saving for your kid’s college education (I bonds are tax free if used for education). Since the stock market can be quite volatile over 5 to 10 years (especially 5 years), the market is not necessarily the best option to preserve capital while still earning interest. When you get closer to the 10 year time horizon, the rewards of stock market investing can begin to outweigh the risks, so consider your time horizon and invest accordingly.

10 to 20 years-or longer- Once you hit the 10+ year range, it is really time to start “investing” your money, and investing in the stock market such as buying index or mutual funds and investing your money in stocks or bonds. You have plenty of time to ride out the fluctuations in the market, so take advantage of the benefits and return potential of the stock market.