Like all other goals in life, financial goals come in a variety of flavor. There are big, lifetime savings goals like saving for retirement, college, or a home that drive the financial industry. There are also the little day-to-day goals, like saving up for a new electronic toy or designer bag. There are even the goals we sometimes don’t even know we should have – like saving up an emergency fund in the event the garage door breaks and needs to be replaced. Each of these goals is also matched by a unique form of saving. Some goals are easier met with a checking account, others an investing account, and even others with a payment plan. One of the questions we often get from our clients is, “what should I be doing with this money?” to which we always respond “what are you wanting to do with it?”
To give you an example, the last few weeks I’ve had several conversations with clients about saving for a down payment on a home. One was saving for a first time home purchase and the other was helping out a child. When it comes to how best to save for a home, one of the most helpful questions you can ask yourself is, "when do you want to buy the home?" Often, the answer is sooner rather than later. When that’s the case, our recommendation is to keep the money in the bank where it’s not at risk of any financial swings. One of the last things you want to do is save up $50,000 for a down payment only to see it drop several thousand dollars (or more) due to market volatility right before you need it. Because home buying typically has a shorter time frame and often requires financial flexibility (in terms of having the cash on hand and ready when you need it), it’s best not to invest savings for a home purchase that you think could occur in the next few years.
On the other hand, the most common financial goal among our clients is saving for retirement. Unlike purchasing a home where you need to pay the down payment once, retirement is an ongoing goal. You don’t just need the funds once. For this reason, it’s not a good idea to keep your savings at the bank or sitting in cash in your investment account. Of course, the risks are the same. There’s a very likely chance that if invested, your retirement savings could lose money here and there. That’s a natural risk that we take when we invest in the markets. At the same time, there’s also a risk that your savings won’t keep up with your needs and that can be a much greater risk that we easily underestimate. Think about how much a tank of gas cost 20 years ago. In 1998, gas cost a little over $1 per gallon. Twenty years before that it cost roughly $.65 per gallon. Now consider what you paid the last time you filled up. Even if you were at Costco, it was still at least double what you would have paid 20 years ago.
Keeping up with inflation is a big deal, which is why when it comes to longer-term goals and ongoing goals, it’s important to have your savings working for you in an account that earns enough to meet your needs. At the same time, risking savings for those near-term goals is something you want to avoid. If you have some financial goals that you’d like some advice on, we’d be happy to share our thoughts (you can contact us here).
McMahon, Tim. "Gasoline 20 Cent a Gallon?" InflationData.com. Feb 27, 2012. https://inflationdata.com/articles/2012/02/27/gasoline-20-cents-a-gallon/.