Let’s be honest: saving for an emergency fund or for retirement can be a bit, well, boring. Maybe you don’t think so but I’m totally unenthused by those two (very important) things.
But the short-term and mid-term goals? That’s where I think the fun is. Maybe it’s because I like to daydream about all of the things that I can do someday soon. But these short-term goals and dreams are the things that make life exciting. These are the goals that create a big life.
We don’t want to save just to have choices when we’re 65. We want choices today as well.
While we’ve put our retirement saving on autopilot, with the no-budget, budget, it’s freed up our mental space to dream about things that aren’t so distant. Things that could happen in the next 2-6+ years.
And I dream about these things a lot.
As we’ve been reflecting on 2017 and planning for 2018, there are two short-term goals that get both Jordan and I really jazzed. Sometimes we have separate goals, and for us that’s fine. But this year both Jordan and I are fully on board with 2 goals that we are really excited to see if we can get to.
Once we got clear on our goals, another question popped up:
Where do we put this money?
The rules are pretty clear for emergency funds and retirement. Your emergency fund or money that you truly need in the short term should go into a savings account or money market account where it will stay safe and you have easy access to it.
Retirement funds or money that you need in 10+ years should be invested in a well-diversified fund (or funds), based on how much risk you want to take.
But these goals in the middle? There’s no one right answer. But there are a lot of great options which I’ll lay out for you here. And I’ll also fill you in on exactly where we’re going to put our money and how we made those decisions.
Easy options for your money are listed in order of risk below. The lowest risk options are presented first, the higher risk options are last. You’ll notice that the higher you move up the risk ladder, the higher the potential returns. Of course, there are more options, but these are the basic big buckets, to get you started:
High Yield Savings or Money Market Account: Your money will be safe and sound put away in a savings account. While these can get a bad rap for being boring, there’s nothing boring about having money there for you when you really want to use it. At the time of this article, you should be able to easily find an account with an APY (annual percentage yield, or interest rate) of over 1%.
CD: a certificate of deposit, or CD, will usually provide a slightly higher rate, but requires you to put away your money for a set amount of time. The term length can vary from 6 months to over 5 years. Right now the rate on a two year CD is 2%.
Bond Index Fund: a bond is a step into investing, but with a much lower risk than stocks. A bond index fund is a good way to spread out your risk over the entire bond market. (Need a refresher on Index Funds and wtf they are? See it here.) You’ll see historical returns for bond funds from approximately 1% to 5%.
Stock Index Fund: this works the same way as a bond index fund, but has a higher risk. There are a lot of variations of stock index funds, but the basic idea is that you can buy into a fund that tracks the entire stock market or a piece of the market (like mid-sized companies, real estate, or technology). Returns are higher, but over the course of history, the stock market has produced 7% annual returns. Want to see the data on returns from 1950 – 2009? It’s over here.
A little of this, a little of that: just like toppings at the frozen yogurt bar, you don’t have to choose just one. You could choose to put your money in all 4 options to spread out the risk – that’s called asset allocation.
The 2 Questions
Before making decisions on what to do money that you’re putting away for mid-term goals, there are 2 questions that you should ask yourself:
Answering the 2 questions
Before making any investment decisions, there are two questions that I always ask:
- How soon do I need this?
What kind of timeline are we looking at? Short, medium, or long.
- What happens if I can’t have it then?
Can I weather the ups and downs of the market or is this money that I will need right away (when I really need it – like emergency savings or a house down payment)?
Brush up on the two questions by reading this article.
Our 2018 Big Life Goals
Jordan has been kicking ass in his career for 12 years now. And he might continue to do so. But he wants the option to pivot, pursue a different passion, and have control over his life, without feeling overwhelmed by the strain of money.
I had a great corporate career and I’ve made a transition to self-employment. But as much as I love what I do and I hope it continues to grow, there are ups and downs in income. It’s an adjustment to not have a steady bi-weekly paycheck.
So to make sure he has control over his career, goal #1 that we have this year is to really put an emphasis on the freedom fund.
Goal #2 is so exciting but very uncertain. Last year we bought a piece of land. In 2 (or so-ish) years we’d like to put a tiny house on it. Not just any tiny house. We want to bring one back with us from Europe when we move home. I love it (check out the site here).
We own a house so this is tiny home is more of an investment. And a fun adventure.
Other examples of mid-term goals:
Tiny house not your jam? Freedom fund not at the top of your list? Here are some other examples of mid-term goals, those 2-10 year goals, that can be difficult to know what to do with.
- A down payment on a home
- A big vacation that you want to take in 2 years
- A 3 month sabbatical from your job
- Starting a new business
Our answers to the 2 questions and where we’re putting our money:
- How soon do I need this?
We’d like to have goal #1 saved in 1 year and goal #2 saved in 2 years. It’s a stretch, but we’re up for a good challenge.
2. What happens if the value drops and I can’t have it then?
With goal #1 (the freedom fund), I think we’d both be pretty heartbroken to not have this money ready in 12 months. Options and control mean a lot to us and this account is going to give us both.
With goal #2, honestly, nothing changes. We’ve already bought our home. This is an investment (or something fun for us to live in). We’re not 100% sure that we can get it through the permitting process. There are a lot of unknowns here and if we have to wait, we have to wait.
How we’ll save this money
Goals like these are the reason I preach buying happiness, rather than adhering to a strict budget. We’re not going to go line by line and set up a budget. We’re not going to stop buying things we love. (Like travel: we’re still going to Paris this weekend.)
Rather than adhere to a strict budget, we’re going to do other things to help us increase the gap between what we make and what we spend. We will do a couple of things like negotiating some of our expenses. (I negotiated our rent, which you can read about here. And the internet, phone, and insurance companies – I’ll be calling you soon.)
And we’re spending intentionally as well, buying the things that make us the happiest and cutting out the things that don’t. Yes, we’re going to Paris. But when planning out our trip, I decided that going to a baking school to learn how to make croissants wasn’t going to make me happier than our two goals. As a trade-off, I’ll skip the class and eat my bodyweight in croissants that come from a bakery.
Where we’ll put it
This is by no means advice for you and your specific situation. But I like to be really transparent and not just give you the textbook information, but how we’re using this in our life. With good information, you can make the best decision for your situation. We’ve done that with ours. So here it goes.
Goal #1: Freedom Fund
Since we want this in a short time frame and are not willing to weather the market ups and downs, we’re going with a very safe option. We looked at both CD’s and Savings/Money Market accounts. (again, a money market account is pretty much the same thing as a savings account, it just normally carries a slightly higher interest rate).
Our criteria for picking an option was: we want to be able to add to the balance monthly as we save, we want access to the money at any time, and we want it to be safe. With a CD you’re not able to add to the balance monthly – what you deposit initially is all that is allowed for that CD. And with most CD’s you don’t have access to the funds whenever you need them. You generally have to keep them locked up for the entire length of the CD (so a 2 year CD means you don’t have access to that money for 2 years).
Our pick: because we want access to our money and we also want to add to the balance monthly as we save, we chose to put our cash in a money market account. We set up a separate money market account with our bank that we created specifically for this goal.
Goal #2: Tiny House
As I mentioned, there is so much uncertainty with this goal. Will we be able to get permits? Will we still want to do it in 2 years? And we’re also not married to the 2-year goal timeline. If the market dips, we’re OK staying the course until it recovers (ie: not pulling our money out if it goes down).
Who knows – we may never actually build this thing and have the money sitting around for 8-10 years. We also already have a primary home, so we look at this as more of an investment/fun project. Because of that, we decided to be a bit cheeky with our risk.
Our pick: A little of this and a little of that. We decided to invest our money and monthly contributions into an Index Fund that divides our money between stocks and bonds. If you want more of an overview of these types of funds, Vanguard has a good description of their funds called “LifeStrategy Funds.”
Figuring this out actually didn’t take that long. Once we got clear on our goals, the money we needed, and our timeline, we had a really easy discussion about where we felt most comfortable keeping the money. And we’ve landed on a decision that feels really easy to now put into place and then set on cruise control.
I’m excited to see where we land in January 2019.
Erica Gellerman is a CPA, MBA, personal finance writer, and founder of The Worth Project: personal finance and family travel. website. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom, and Lifehacker. When she's not writing about personal finance you can find Erica exploring Europe from her temporary home base in London.
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