Contrast The Differences Between Short-, Medium- And Long-Term Financial Goals To Build Wealth

Understand Why to Contrast the Differences Between Short-, Medium- and Long-term Financial Goals and Become a Better Investor

Financial goal setting might be the next best thing to working with a smart financial advisor, and it’s free. Lack of financial goal setting is akin to driving cross country without GPS. Without a plan, it’s unlikely that you’ll reach your destination.

By smoothing out your lifetime income across your working and non-working years, and planning and investing, you set yourself up to live your best life. And, the first step to financial success comes from understanding the differences between short-, medium- and long-term financial goals. It’s almost like magic, that when you write down your financial goals and create a plan, you’re much more likely to meet them. 

 This article is a roadmap for creating financial goals and a plan that works.

You’ll learn:

• How do long-term goals differ from short-term goals.  
• How to invest for mid-term goals, short-term and goals many years into the future. 
• What types of accounts are appropriate for your financial goals.
• How to invest for the short-, mid- and long-term.

What are Short-, Medium- and Long-term Financial Goals?

Goal setting leads to financial success. So, how do long-term financial goals differ from short-term financial goals? After understanding, how do short-term goals differ from long-term goals, we’ll also take a look at where do medium-term financial goals fit in?

A trip to the beach next summer falls in the short-term financial goal bucket. While a typical long-term financial goal is to build a seven-figure retirement portfolio by age 65.

The distinction between short-, medium- and long-term financial goals is fluid. The reason for creating these three money buckets is important. You want the funds for each type of goal to be accessible when needed, and to design a path to invest appropriately for each type of financial goal.

We contrast the differences between short-, medium- and long-term goals by when you’ll need the money. Each time period is an approximation. You’ll learn why to invest differently for medium-term goals vs. short- or long-term financial goals.

How do short-, medium- and long-term goals differ?

We contrast the differences between short-, medium-, and long-term financial goals with a flexible yardstick. The timeline of short-, medium- and long-term financial goal setting is flexible and integrated with the recommended investments for each time period.

Short term financial goals – These are expenses expected this year or next such as a pending electric car purchase, home repairs, this year’s college tuition payments and next summer’s vacation.

Medium term financial goals – The medium-term goals can extend from two to eight years. These goals include saving for a new home downpayment, a car, a vacation home, a work sabbatical or extended travel. Money for medium-term goals is invested more conservatively than the cash you’re investing for retirement and long-term financial goals.

Long term financial goals – Anything you want in eight years to a decade or more falls into the long-term financial goal bucket. Retirement is the ultimate long-term financial goal, but this category can also include early-retirement, financing a young child’s college education or buying a second home in 10 years. Money needed in eight or more years can be invested aggressively, for higher returns.

Once you’ve written out your short-, medium- and long-term financial goals, you’ll need a plan to achieve them. A tried-and-true path to financial success and goal achievement is through investing.

How to Set Financial Goals

Setting financial goals is a process and getting started will put you on a path to financial success. “Does Monitoring Goal Progress Promote Goal Attainment?” (apa.org), an article in The Psychological Bulletin found that tracking and setting goals leads to greater achievement.

Financial goal setting that defines your future goals and aspirations and assigns them a cost and timeline. Once the goals are written down, you create a plan to achieve them.

Setting Short-, Medium- and Long-term Goals

First, envision how you want your life to look in the future. Consider what’s important to you and your family. Understand how short-term financial goals differ from long-term financial goals. Realize that you’ll need to make tradeoffs, as few have the financial resources to fund all of their goals. Write out your goals, to make them a reality.

• Create a page for each category of financial goal; short-, medium- and long-term. Then, start with one category. Make three columns, one for the goal, another for the timeline and a third for the cost (see the table above).
• List your goals, according to the categories. For example, a short-term goal might be to pay off debt or build a six-month emergency fund. While your medium-term goals will be to buy or remodel a home, plan a wedding or fund your 12-year-olds college expenses. The long-term goal usually revolves around retirement, travel or buying a vacation home.
• For each goal, list two categories, one is an approximate date to attain the goal and the other is an estimate of how much money you’ll need to accomplish the goal. For example, you might strive for $2 million at age 65 and $25,000 in ten-years to help fund college expenses for your child.

Look at the goal setting list as a work in progress, open to adjustments.

Next, you’ll learn how to save and invest for short-, mid- and long-term goals.

How to Save and Invest for Short-, Medium- and Long-term Goals

Saving for short-, medium- and long-term goals is the same process. Regularly, transfer money from your paycheck or checking account into the appropriate goal-related account. Automate the transfer and you’re more likely to succeed.

Knowing which accounts and types of investments are key to attaining your financial goals.

Types of accounts:

Single or joint taxable investment brokerage. This is an account that enables you to buy and sell stocks, bonds and funds, with the click of a button. You’ll pay annual taxes on the realized dividend and interest income and capital gains. Investments sold at a loss, can offset taxable gains.

Traditional or Roth IRA is a tax advantaged account where all money in the account grows tax-exempt. You choose how to invest. Money can’t be extracted from the account without penalty before age 59 1/2 or under special circumstances. A traditional IRA is invested with pre-tax dollars (you don’t pay any income taxes on the money when you contribute and thus reduce your taxable income for that year). You’re required to withdraw money from the account in retirement, when tax will be due on your withdrawals. A Roth IRA is funded with post-tax dollars and can remain invested for your lifetime, with no withdrawal requirements.

A 401(k), 403(b) and TSA are retirement accounts offered by your employer and can either be traditional or Roth. Frequently, your employer contributes an amount to your 401(k), along with your own investments. You select your investments from an approved list selected by your employer. The other parameters of this type of retirement account are similar to the traditional and Roth IRAs. 

Next, you’ll save or invest, according to when you’ll need the money. If you’ll need the money soon, then cash-type investments will maintain a stable value. For longer term financial goals, stock-type investments promise higher returns, but also decline in value on occasion. Money for mid-term financial goals might also be invested in short- or intermediate-term bond funds.

How to Save and Invest for Short-term Financial Goals?

Where: Invest in a bank or taxable investment brokerage account. Have an amount transferred automatically from your paycheck into your bank or brokerage account.

What: At a bank choose a high yield savings account or certificate of deposit. In your taxable investment brokerage account invest in a money market mutual fund such as the Schwab Value Advantage Money Fund (SWVXX) or Fidelity Government Money Market Fund (SPAXX). You can also buy a brokered certificate of deposit in your investment account.

Why: You will need your money within the next few years, and don’t want to risk losses. High yield savings accounts, money market mutual funds and CDs deliver interest payments and will hold their value, with virtually no loss of principal.

How to Save and Invest for Medium-term Financial Goals?

Where: Investment brokerage account such as eTrade, Fidelity, Schwab or Vanguard. Investment apps such as M1 Finance and Robinhood are other alternatives. Have an amount transferred automatically from your paycheck into your brokerage account or financial app.

What: If you can’t afford to lose any of your principal, then your investment choices are the same as for short-term financial goals – high yield cash investments. If you’re willing to risk a small loss, with the hope of gaining a greater return on your capital, you might select a short or intermediate term bond ETF, in addition to the high yield cash options.

Bond funds own many individual bonds and pay the shareholder regular interest payments, which you can take as cash or reinvest. You’ll likely receive higher payments than the cash-equivalent investments, and should market interest rates fall, you’ll receive capital appreciation as well. Compare yields on high-yield cash investments and short- or intermediate-bond funds to help decide where to invest for your mid-term financial goals.

Why: If you have a medium-term financial goal, and you invest in the stock market, the upside could be annual double-digit yields. But it’s also likely that during those seven years, your stock investments will suffer losses. The stock market has delivered superior long-term returns, but every five years or so, stock prices typically fall from a few percent to 20% or 30%. If you’re saving $100,000 for a home downpayment in seven years, and in year six the stock market drops 25%, you’ve just lost one quarter of your money.

When investing for mid-term financial goals, keep the majority of your money in high yield cash, short to intermediate bond ETFs, with a smaller allocation to diversified stock ETFs.

How to Save and Invest for Long-Term Financial Goals?

Where: Invest for retirement and goals that are decades away in your workplace retirement account, such as a 401(k), 403(b) or TSA. Your money will be deducted from your paycheck and invested in the account. Frequently, you’re employer will add in several percent as well. In addition, consider opening a Traditional or Roth IRA at your investment broker or app.

What: If your long term financial goals are decades in the future, a portfolio of diversified stock funds with a small allocation to bonds, is likely to provide the highest long-term financial returns. Just be prepared for price volatility in your funds. Click here for a lazy investing strategy for long-term investors.

Why: Although the future isn’t guarantee, over decades of historical investment return study, stocks have delivered higher returns than bonds or cash. If you believe that U.S. and international companies will continue to grow, then long-term investing in the stock market is a sound approach.

Short-, Medium-, and Long-Term Financial Goals Comparison Wrap Up

Smart investors contrast short-, medium- and long-term goals and prepare distinct saving and investment strategies for each bucket. Money you need soon should be invested conservatively in cash-like investments. That way, the money will be available when you’re ready to buy a new washing machine next year. Save and invest aggressively for retirement in a tax-protected account such as an IRA or 401(k). Allocate a large proportion of your money to higher return diversified stock funds, both U.S. and international.

Financial goal setting, combined with automatic saving and investing, will place you on a path for financial success.

This post originally appeared at Barbara Friedberg Personal Finance.

Category: Personal Finance