You’ve heard the saying, “Time is money,” right?
When it comes to investing, it’s absolutely true! The more time you have to reach your goal, the more your investments can help you. But before you can create an asset allocation and start buying mutual funds, you need to determine the initial timeframe for each goal. In other words, you need to know when you want to accomplish each goal and when you’ll need to start withdrawing money from each investment account.
Select the initial timeframe from the options below for each goal:
- Immediate – Less than one year
- Close – One to two years
- Approaching – Two to four years
- Intermediate – Four to eight years
- Distant – Over eight years
This step is very important because it will determine how conservative or aggressive each of your investment accounts are allocated, the projected investment return, and how much “help” you need to reach your goals from your investments. The more time you have to reach your goal, the less money you need to save and the more the dividends, interest, and growth from your investments will propel you to your goal. This is the power of compound investing.
Immediate timeframe (less than 1 year away)
If your goal is less than a year away, you will want to invest in something very conservative. You do not want to risk investing in anything aggressive because you will need access to the money soon. Instead of trying to hit a home-run with your investments, your greatest objective should be protecting them. Because you have very little time for compound investing to work and because you are investing conservatively, the final account value will come almost entirely from your contributions.
Close timeframe (1- 2 years away)
If your goal is between one and two years away, be careful. Although the timeframe to reach your goal is far enough away to warrant investing, you still must invest very conservatively. Because of the conservative investments, most of the final account value will come from your contributions and only a small part will result from dividends, interest, and the growth of your investments.
Approaching timeframe (2- 4 years away)
If your goal is between two and four years away, your money can be invested a little more aggressively. While the majority of your bucket will be from your contributions, a good part of it should also be from dividends, interest, and the growth of your investments.
Intermediate timeframe (4- 8 years away)
If your goal is between four and eight years away, you have even more investment flexibility. You can invest more aggressively, especially if you goal is seven or eight years away. Depending on your investment allocation, the dividends, interest, and growth of your investments should be a big help in reaching your goal.
Distant timeframe (8+ years away)
The bad news is that you won’t be able to enjoy accomplishing your goal for a number of years, but the good news is that you’ll be able to invest your savings and will get a lot of help from compound investing.
The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.