When setting financial goals, it can be easy to be nearsighted and farsighted at the same time.
We save for the short-term to bolster our emergency fund, pay off credit card debts, take a trip, or make a big purchase. That’s not so hard, because the need is right in front of us and the payoff is immediate.
We also save for the long-term to build up a healthy retirement nest egg, because the importance of doing this has been drilled into us since birth.
Both of these savings efforts are commendable, but they also leave a gap in the middle, around your medium-term financial goals. This tendency to save unevenly has been called the “barbell” approach.
What is a Medium-Term Financial Goal?
Medium-term financial goals are those that you feel you can achieve in the next five to ten years. These may include saving enough money for a down payment on a house, renovating your home, paying off a large student loan, buying a car, or raising a baby (and later paying for that baby’s college education). Your medium-term financial goals will differ depending on where you are in your life, but whether you are 25 or 55, it is important to address them. Otherwise, you may end up being forced to use high interest credit cards as life events come along, or face penalties for making early withdrawals from your retirement funds.
Setting medium-term financial goals requires sitting down and thinking seriously about what you really want in the next five to ten years. It always helps to be saving towards something specific, and even if that something currently feels a bit distant (e.g. you aren’t married yet but want kids once you are), it’s always better to start making progress today. Your goals should be achievable, specific, and measurable: figure out the total amount you’ll need, when you’d like to hit that goal, and how much you should save and/or invest every month to get there.
The next step is to figure out how to allocate your savings. Unlike retirement funds, you want this money to be accessible, but unlike short-term savings, you want a vehicle that will allow the funds to appreciate. A good strategy is to balance high-quality fixed-income investments, such as medium-term government bond funds or high-yield FDIC-insured CDs, with modest-growth investments, such as a diversified large company stock fund or an ETF.
Then, you’ll want to pay attention to your investments over time, to keep them in line with your investing plan. The right balance of stocks and bonds will shift towards more stable investments as you approach the time you need the money.
Saving takes discipline, especially when you’re paying attention to multiple goals that are short-, medium-, and long-term. However, the payoff is well worth it. If you ever feel like neglecting or ignoring medium-term savings goals, just envision yourself in a beautiful new home, on a six-month sabbatical in Europe, or sending your kid off to their dream university. Saving will feel much easier.
Disclaimer: The views expressed are for informational purposes only and are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities by FutureAdvisor. All expressions of opinion are subject to change without notice in reaction to shifting market, economic, or political conditions. The investment strategies mentioned are not personalized to your financial circumstances or investment objectives, and differences in account size, the timing of transactions and market conditions prevailing at the time of investment may lead to different results. Clients may lose money. Past performance is not indicative of future results. Investments in securities involve the risk of loss. Any tax strategies discussed should not be interpreted as tax advice and do not represent in any manner that the tax consequences detailed will be obtained. Clients should consult with their personal tax advisors regarding the tax consequences of investing.