How to Plan For 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 ��

Original article and pictures take stefanieoconnell.com site