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Medium Term Financial Goals

How to Plan For Medium Term Financial Goals

I’m a 28 year old, unmarried, young professional, with no children – and I love it.

I love the flexibility that comes without the financial obligations of a mortgage or having to be responsible for another living thing (pet or child). I love the freedom to be totally selfish with my time and money – funding the pursuit of my wildest dreams, starting my own business, and traveling the world. I love my life – it is fun, exciting, and unpredictable…. but I think I might be growing up.

Don’t worry, I’m not ready to put my roots down any time in the too near future; but children, possibly marriage, and homeownership have definitely started to make an appearance on my five to ten year life plan radar which means it’s time to make some financial considerations.

Thus far my long term approach to finances has been fairly simple – keep my cost of living low and split everything else between emergency fund savings and retirement accounts.

It was a great strategy when I didn’t have any major medium term (five to ten year) goals on the horizon, but with those expensive prospects starting to come into view, it’s time to think about how to prepare financially for those realities, so that when the time comes, I’m equipped with options rather than scrambling for contingencies.

The Danger of the Financial Planning Barbell

I have my friend and fellow blogger, Shannon, from Financially Blonde (and author of Train Your Way to Financial Fitness) to thank for the moment of introspection that led to this most recent revelation. I was listening to her podcast, Martinis and Your Money, when she started talking about millennial investing and the danger of the “barbell” approach.

Shannon talks about separating your finances into three bucket s- emergency fund money, retirement fund money, and life fund money. In her work as a financial planner she finds that people, and Millennials in particular, often contribute to their emergency fund and their retirement accounts while neglecting their middle, life bucket, leaving them with a financial “barbell”.

The trouble with this “barbell” approach is that without the middle “life” bucket, there isn’t much liquid cash to pay for all the things you want to do in between today and retirement- whether it’s buying a home, having a wedding, raising a baby, or some other major money sucker.

As such, many people wind up having to rely on high interest credit cards and loans or wind up paying fees and penalties to dip into their retirement accounts early.

Funding My Life

I have to say that up until this point, the financial barbell method has actually served me quite well. With major life expenses officially in the long-term goal (over 10 year) category, pouring money beyond my immediate expense needs into emergency fund savings and retirement accounts allowed me to establish an essential financial foundation.

But as the big 3-0 grows nearer, the reality of my age and all the time dependent things I’d like to accomplish in my life (i.e. having children before that shit shuts down) is dawning on me. And while I don’t want to go there any time soon, that doesn’t mean I should wait until it’s go time to prepare financially.

How to Prepare for Medium Term Financial Goals

A Google search of “how to financially prepare for medium term financial goals” yields shockingly few relevant results, but thankfully, Shannon offers some specific advice in her Millennial Investing podcast episode.

Build Your Wish List. What do you want your life to look like in the next five to ten years and what is the approximate cost of funding those things? This doesn’t have to be super specific, but know that depending on the amount of major money obligations you hope to take on (particularly the big three- wedding, down payment, child), that number will probably be somewhere in the 50k-100k range.

Fund Liquid Investments. Once you figure out how much money you’re going to set aside, it’s time to figure out where to store it, so that you can keep it liquid while letting it grow. In her podcast, Shannon recommends a mix of stocks and bonds. (Note that these would be held outside the tax shelter of a retirement account, so you would have to pay capital gains tax on any returns when you sell). She recommends ETFs as a good way to get a diversification without getting stuck paying high fees.

Like I said, I wasn’t able to find many differing viewpoints because of the shockingly few entries regarding this specific (yet hugely important) topic, but I did come across a mention of keeping this medium term money in more conservative vehicles like money market accounts, high yield savings, and CDs.

As for me, I wish there were some better form of in between. While my ETFs have served me quite well in my retirement accounts, they still have potential for volatility. If another 2008 happened right before I needed to withdraw the funds for a down payment, I’d be pretty f-ed.

On the other hand, keeping it all in savings, however high yield, seems like the ultimate way to miss out on a lot of growth and investment earning potential.

So now that I’ve got you all thinking about medium term financial goals, maybe we can get the discussion/debate going. How would you optimize your asset allocation to fund those 5-10 year goals in a way that made you feel safe without missing out on potential growth? Thus far Shannon’s approach is winning for me 🙂

 

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67 responses to “How to Plan For Medium Term Financial Goals

  1. I’m all about medium term goals. Short term is obvious-pay off debt. Amd long term pretty generic-healthy retirement etc etc. It’s the medium goals that get me going though. Within 3-8 years we have a long list which includes having another kid, moving and travel (including potential Olympics). I find it motivates my short term goals to think *just* beyond them ie: my medium term goals.

  2. I agree that Millennials are very emergency fund and retirement heavy, but that’s what’s been beat into us for the last 5 years. I’ve been looking for a savings vehicle for my Down Payment fund for a while. I had it in a CD but that was paying 0.75% – lame. I think I found my answer in a Vanguard LifeStrategy Income Fund. Its 80% bonds, 20% stocks and is meant for goals 3- 5 years out. I’m sure it will fluctuate a little bit, but not enough to think “OMG where did my down payment go!”

    “before that shit shuts down” bahahaha

  3. I swear every time a subject like this comes up I always feel so behind the times. Right now I only have a retirement fund and a heap of debt I need to get off my back. I am really blessed because I just have one child and as far as her education my military benefits will take care of that. She will also be covered medically until age 23 as a fulltime student. My short time goal is to become debt free then hit up a financial advisor to help me catch up. Enjoy your singleness for one it comes….it comes.

  4. Great topic choice — I’m busy catching up on retirement and emergency fund contributions, but medium-term money is next on my horizon and I should be able to start tackling it more seriously at the end of 2015. Thus, this has been on my mind. I’m also unsatisfied with all the current options I’ve been able to find; even if interest rates finally start to rise again this year it’ll take a while for them to get back to a reasonable place for high-yield savings accounts. I think what I’ve arrived at is this: I feel like another crash is likely sooner rather than later. I hope it won’t be as deep as the 2008 one, but still. Therefore, I’m going to hold medium-term money in savings for the present. If the market crashes, I’ll throw my savings money into it; if it doesn’t crash, I’ll reassess my plan when I hit $5000 in medium-term money, then when I hit $10,000. I’m not wild about this plan though so I’m open to other ideas!

  5. Very good advice! It really is easy to be focused on killing it with retirement contributions that you forget to fund other goals as well. For me, if I’m looking at a 3-6 year time frame, I’d invest almost exclusively in bonds. More than 6 years and I’d add some stock ETFs. I’m pretty conservative when it comes to potential house money. Longer term “I don’t know what I could possibly do with this” money I invest 15% international stock, 15% REITs, 50% US stocks, and 20% bonds.

  6. I think it makes sense that millenials have a barbell approach. Saving for retirement is a great abit to get into early. Plus, building up an emergency fund is a great way to just start saving. Once it’s full, those savings can go to other goals. If a big life event comes up, the emergency fund can be pilfered before credit cards are used. That being said, medium term goals are important too and should be a part of your financial plan.

    I don’t have an answer for the best solution, but I do have some more considerations for finding your risk tolerance mix here. What’s the first goal that will be coming up for you? Personally I would probably have a different plan for a goal that would be 5 years away than one that would be 10 years away.

    How much will those goals actually cost? Weddings can cost as much or as little as you want them to. It can be hard to predict what you and a future partner would want (maybe you’ll decide to not actually get married!). Houses have a higher entry cost to buy a house of any kind. If there’s wiggle room in the cost of your goal, it might be ok to take on more risk.

    How likely is your goal to actually happen? If you’ll be buying a house in 5 years, with or without a partner, I would think you’d want to have lower risk investments for that goal.

    1. I get worried about Millennials raiding their emergency funds to fund medium term goals. I think it can leave them vulnerable should a real emergency arise.

      Because I don’t know what the future holds for me partner wise, I think operating on the assumption that I will be solely responsible for the purchase of my home and supporting a child is the best way to plan. That way, if I have help, I’m more than ready and if I don’t, I’m still ok.

  7. Totally agree. Your vehicle of choice may not be an ETF, because many medium term goals that are too close for stocks but too far for CDs require a mix of bonds and stocks….an income or growth and income mutual fund is in the sweet spot for many 6-10 year goals…..

  8. Excellent topic Stefanie! We can get so caught up in the moment while focusing on some nebulous (at times) future that medium-term things just get completely overlooked or glossed over. The crazy thing is those goals or needs can turn into even bigger money sucks by doing so. I personally like to use the bucket approach and put funds aside for each at varying amounts to try and tackle all three levels from short to long-term. I personally look for a good, low-cost income/growth fund to try and tackle the mid-term goals.

  9. We have a number of medium term goals we want to save for, travel, home improvements etc. right now we just have an extra saving account for these goals. Would like to find some type of investment that give me the flexibility to have the money available when I need it but earn something above standard saving interest rates. Same goes for our e-fund $.

  10. We don’t really save for the “medium term” as you refer to it, as our normal cash flow can pay for just about anything.

    In terms of funding stuff 5-10 years away, I think it depends on how many assets you have. We have enough in taxable accounts that we can take the market risk and still be ok. We still run $50k or so in a 5 year CD ladder and we’re looking at another $50k or so in a munibond ladder. And let’s be honest, if a market crash happens, “medium term” goals as we are calling it here get scrapped – vacations, home improvements etc.

    1. My medium term goals include home ownership and having a child so I don’t know that I’m willing to scrap them quite so easily. I also know that for me, my normal cashflow is not nearly enough to fund those expenses, and I think the same is true for most other people.

  11. I have a huge spreadsheet on Excel where I wrote my current budget and occasional bills (AAA, car registration, basic car maintenance like an oil change). Then a few weeks ago I added to this spreadsheet all the things I wanted to do and to have in life. So I made a list of current and future savings goals and wants. I added categories and then I wrote amt. needed and amt. saved so far. for each of them, I added stuff like:

    Charity (how much to donate per year), vacation, dental checkup, paid off-house, clothes and shoes, replacement car, replacement clothes, appliances, furniture, retirement, house emergencies, replacement furniture and appliances, future dental work, emergency fund, luxury car, and wants like Netflix, Glossy Box, Gourmet Food, parties (weddings, birthdays, etc.), you get the gist. 😉

    I’ll also allow for flexibility on all categories…after I graduate I’ll probably go on a cheapie vacation so I’ll save up like $1,000 and go to Colorado but for the year after that I’ll want a more luxurious vacation so I’ll probably save up to $7,000 (I’d love to go to England or France). When I make more money I’ll donate more to Charity, but on some categories I don’t want to get too flexible for example on clothing, I’m okay with shopping at J.C. Penney, Macy’s and Ann Taylor. Unless I become a multi-millionaire I won’t be shopping at Channel.

    I even went on Amazon and have several wishlists on basic furniture and appliances I want to have on my home. I also did it by room: I have a bathroom, bedroom, kitchen, living room, patio and studio wish lists. I also added an extras wish list which includes cleaning supplies, tools, emergency kits, carbon monoxide detectors, Christmas decorations, and LED flashlight, etc.

    In order to better make use of my money I have decided that I’ll stick to “classic” styles in regard to home furniture and appliances. I don’t like the idea of decorating constantly like decor magazines encourage.

    It sounds intense but it makes sense in my head, I feel like now every dollar has somewhere to go whether in the present or the future, instead of being spent randomly and then wondering where it all went. lol 🙂

  12. Really interesting to think about! While I am a long-term planner, nothing huge is on my goal list, so I haven’t thought much about saving for it. My immediate goal is to get my student loans paid off. I want to pay as little as possible for a wedding, and fund it with savings I already have (or can easily stash away in a year). I think millennials are also a little wary of investing for the short(er)-term, and don’t quite know how to go about it. I’ll have to look into the funds John and Joe mentioned!

  13. Great post Stefanie!!! And exactly what frustrates me (as I mentioned in the podcast) about the general investing advice out there. The fact is that you can take more risk when you have 5+ years, just look at 2009 for an example, yes the market dropped in half, but it fully recovered in 5 years and now it’s beyond where it was when it dropped. The thing is you can’t take as much risk as your retirement which is why asset allocation is so important. Anywho, I am glad that my podcast made you think and raise this question, it should definitely be discussed more!

  14. Medium goals are something you don’t see mentioned all that often. I do hate to see money sitting around in savings, but we have more than we probably should in those type accounts so I can’t say too much about not cashing in on potential interest. I’d be really pissed if I socked a bunch away in stocks to buy a house and then some crazy earth event happened that sent it nosediving. For 5-10 years, I’d probably say invest in a good mix like Shannon said. I really like Betterment for that type thing. Less than 5, I’d keep it pretty safe.

    1. I feel like a lot of these goals could go either way either 4 or 5 years or 6 to 7, makes it a little harder to plan, but I guess erring on the side of conservative is probably a good idea.

  15. This is a great post! I have a friend of mine who always divides her accounts this way. It can be so automatic to save for retirement and once you save up for an emergency fund, you don’t have to think about it anymore. I think sometimes it’s overwhelming to think about saving for other goals. Like, aren’t we doing enough? Since I get paid every two weeks, I try to use those funds for big ticket items like vacations – that’s worked out well so far!

    1. I think the biggest thing is just being conscious and aware of those expenses so that they don’t completely catch you off guard and drain your emergency fund when the time comes.

  16. I have never heard the term barbell investing before… but I LOVE it. I see this problem ALL the time, and people think we are crazy for not dealing with retirement accounts very much. Thirties are an expensive time of life for many people. We’ve now paid for two of the big three you mentioned, plus purchased a vehicle, and kids are not on the horizon. Next up is to fill our TFSA accounts, which, should we decide to have kids, would be the first line of cash for us.
    I am totally going to be writing about this barbell phenomenon!

    1. Now that you mention it, I’m thinking of a whole slew of other expenses like- life insurance and additional healthcare- things I never had to worry about before having dependents.

  17. I think that Shannon’s goals for the 5 year plan make a lot of sense, that’s sort of how I handled it when I was looking to buy my house. I stayed mostly with ETF’s while I was that far out. I think if I were to do it over I would buy more stocks, but that’s just cause I have more experience with it now. Also, once you get down to the 2 year mark you might want to get into less volatile stocks or ETFs depending on what you picked. Personally I start to stray more towards big blue chip dividend companies when I’m trying to be more defensive while still trying to stay in the market.

    But once you get down to the 1 year outlook that’s when you might want to think about good exit points. If something has done particularly well for the past month, maybe get out when you’re ahead and then move into those boring money market accounts and CD’s. Exiting on a high note might be better than the “possible” $1k or $2k you might make by staying in too long, because you could just as easily wait too long and be…. well, like you said, f-ed.

  18. The house and kid situation is all squared away over here, so our main medium-term goals are traveling and staying the course. I feel like we strike a good balance between spending today and saving for tomorrow, but it took a while to get there.

  19. First time popping by (from Budgets Are Sexy… somehoe…) and glad to have found your perspective!

    Those medium-range goals to me are more like what we save for through sinking funds – just google “Sinking Fund” and maybe Dave ramsey and you’ll find a ton of people talking about this, just not with the same lingo.

    And I have to say, unless you’re paying for half a house, I’m shocked that she said plan for between 50-100K in savings for the birth of a baby, a wedding and a down payment. Our wedding cost less than 5K and we had 150 people attend. Our two babies can not have cost more than that same amount to birth, cloth, and house. We pay $1200 per month on childcare total, and that will end in a few years when they both begin school. Unless you’re planning to save for all childcare they will ever have to have ahead of time, your money is better spent elsewhere – and you don’t want those medium term goals in stocks in the first place, since investing is for long term planning. There’s too much risk with that short of a timeframe. Plus, the whole premise of your friend’s perspective is that you know what you’ll be doing in 5 – 10 years… and that’s ridiculous. You could already know Mr. Right, you could start dating tomorrow, you could be married in a year, or have kids in a year – no one said you have to be married to have kids – etc etc etc.

    So… intersting perspective but I think the premise is a little wonky.

    1. Hi Kati, thanks for dropping by!

      Hmmm… haven’t heard of “sinking funds” but will absolutely google it.

      I think you’re right about not being able to know exactly what the future holds, but I still think planning to a point is a good strategy to maintain your options once you get there. As for amount, I’m planning my future funds as though I’ll be funding the expenses myself. I’d rather be overfunded than underfunded.

    2. Hi Kati! I appreciate your perspective, but as a trained financial planner who has been helping people (especially millennials) with their money for the last three years I have to say that my advice is not “wonky.” Stefanie paraphrased some of my podcast, but you should listen to the entire thing to hear what I say. I do not suggest anyone putting all of their money in stocks and especially for medium term goals, you should have a more balanced approach. As far as the savings amount, you need at least a 20% down payment to buy a home (plus extra cash for taxes, fees and potential home repairs not found by a home inspector). The median home sale price in the US is around $200,000, so that means $40,000 in cash for a down payment right there. The average wedding cost in the US is $25,000. Could you do it cheaper? Yes. But depending on where you live, that may be a challenge. I also advise saving for your child’s first year of life up front. If you need childcare, the average cost per month is $972 or $11,664. Just based on averages for those three life events that equals $76,664. I like to see my clients OVER prepared for life’s journey rather than UNDER prepared. When they are over prepared they stay out of debt and credit card troubles, have less relationship struggles and less stress overall. As to sinking funds, that is essentially a savings account that earns little to no income which is fine for money you need within two years but you will barely out perform inflation if you stay in it too long.

  20. I’m not really a huge fan of CD’s since many are about the same interest rate or even less than an Ally savings account. A decent place to put your intermediate goal money may be a taxable account like Betterment but have a 50/50 mix of stocks and bonds. This can be adjusted depending on how risk averse you are, but more than likely this would do better than a savings account but not as risky as a 100% stocks retirement account. Best of luck with all of your short, intermediate and long term goals!

  21. Love this! I’ve been thinking about this a lot lately and agree there’s no magic plan for medium-term money – I actually think it’s the most dangerous of all the savings. I just opened a new savings account with Barclays because of their whopping 1% interest to start saving for a down payment on a house, but I’m really not convinced it’s the best choice.

    1. That’s what I have right now. A savings account that houses all my E money and whatever big purchase that might come up in the near to mid term future. But I’m realizing that’s not such a great strategy.

  22. (i.e. having children before that shit shuts down) – HAHAHAHA! I loved that line.
    Funnily enough, Peach and I just had a conversation about medium-term financial goals last weekend. I’ve started to realize I need to prioritize saving for a 20% down payment on a home + emergency fund for said home, a car and a nest egg for children in about 7-10 years. I created a goal of having $120k set aside for all these goals to give me plenty of wiggle room. We’ll see what happens in the next few years!

  23. Great post as always, Stefanie! I have a hard time thinking about my medium term goals. I know my short-term goals are to pay off debt and long-term goals are to pad my retirement and invest. But I don’t want things like a house, nor any children. I just want to travel. Does that sound selfish? Ha, don’t answer that. I’m sure once I’m debt free, other medium term goals will appear.

  24. Great post. I didn’t plan for medium term goals, and I ended up deep in debt as a result. Right now I’m worried about splitting priorities while trying to aggressively pay off debt, but I think you’re spot on when you talk about the need to create a a third “life” fund. That may just be the answer I was looking for – to the question about splitting priorities. Thanks!

  25. The financial planning barbell is a good way to put it. We definitely fall into that category of having only long-term and short-term saving. Well, we do have some money invested for the medium term, but it’s not really tied to a goal, just serving as collateral for our debt. That is because we really don’t have any mid-term goals on the horizon that we can tie specific dollar amounts or timeframes to. When they come up, we will certainly set a goal and save for it.

    I actually don’t mind the barbell too much. I like that we’re over-saving into retirement accounts right now, because later when we do have mid-term goals we can divert part of that long-term savings rate to the new goal without getting behind on the long-term saving.

  26. I’m loving this word picture. Jon and I have been talking a lot about this, that we have the now and then figured about but not much in between. How to we avoid living too much for the far future and not enough for the near future? Great refreshing post.

  27. I’m 43 unmarried and love it. No kids sucking the money out of the ole wallet either.

    Not a fan of bonds… If you aren’t going to need the money for 40 years, let it ride the wave of the markets. You will do quite well.

  28. You shouldn’t even worry about a 2008 at your age. Just keep buying through the market. The people that screwed themselves pulled out. I hear young people saying they are in cash and don’t want to use the market. That is really dumb. Can’t gloss over it. 2008 came and went. I kept buying. Now I’m reaping the dividends of doing so. I’m waiting for another dip and will buy through that as well. It’s like buying on sale. And we all like sales.

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