There are a lot of questions that people want to ask about their finances and they often seek answers from their advisors. Some of the most common questions I hear relate to whether or not a client should invest in real estate or which stocks are performing better than average lately. When I hear these questions, I always try to take a few steps back with my client and make sure they have a firm foundation of the investment world before we begin addressing questions of this nature. It’s common for investors—especially those who are just beginning to see money come in from their first ‘real’ jobs—to jump the gun and skip over the basics. This series of blogs will touch on those basics to help you get a better understanding of necessary concepts so you can begin moving on to the bigger (and usually more exciting) parts of investing.
The first concept you need to understand is the timeline of what you are saving for. These should be pretty big ticket items or events that are milestones in your life and that you’ll need a pretty big chunk of change for. Once you’ve identified them, you can then work with your advisor to choose a realistic timeframe and strategy for accomplishing your goals. I find that most of my clients’ goals fall into one of these three timeline categories.
1-3 Years
A timeline of one to three years is realistic for goals like buying a car or first home or having a wedding. If these are on your list, you should forget about investing and focus on saving. Investments are synonymous with volatility. If you’re not in it for the long haul, it’s possible you’ll lose money in the market, which is clearly not a way to achieve your goals. By putting your money into bank or money market accounts, you can keep it safe and gain a little interest to ensure you meet your goals in the right timeframe.
It’s also important to understand if there is something I call WRF in these goals. WRF stands for ‘wiggle room factor’, and it applies to goals that don’t have to be met within a certain timeframe. For example, I had a client whose husband was being deployed by the military in five years and their goal was to get a home before that. There’s no WRF there because there is an absolute deadline. However, if your goal is to start a business—ideally within the next three years—you’ve got some wiggle room there. This is where emotional flexibility comes in handy. If you’re not dead set on when your goal needs to be achieved, you can have more options in how you save for it.
3-10 Years
If your needs fall into the 3-10 year category, you have a few more options. These goals usually include things like moving to a new city or state, buying a home, or leaving your current career to start your own business. If you’ve got a 3-10 year timeframe with no real hard deadlines, you can take advantage of the best of both worlds by saving and investing for these goals. How much you do of each is going to depend on how much money you’ll need and when exactly you’ll need it. Your advisor can help you zero in on the details and determine how much risk is appropriate.
10+ Years
When you look at long-term goals, you’re usually projecting them out to at least a decade into the future. This would include the big milestones like retiring and paying for your kids’ education. This is where you can really start looking at investment options with your advisor. If you’re a young adult, you could have thirty years or more to plan for these goals and this gives you more than enough time to ride out volatility and to give your investments a chance to really grow. You’ll have some smaller goals to accomplish in the meantime, of course, but that’s where the above two options can come into play. If you think you’re too young to plan for things like retirement, I can assure you you’re not. Ask your advisor to show you some basic numbers on concepts like compound interest and you’ll see that investing early (and often) is never a mistake.
If you’re working with a true financial counselor who challenges you, you should receive a full education on the foundations of investments to help you make sound financial voices. In the next blogs, we’ll explore topics like taxes and real returns so you can make sure your financial educations are complete!
Have questions or comments on helping your clients understand timelines? Please leave them below!
