When (and How) to Start Investing For the Short Term

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Life isn’t all about retirement. So many people save and save and save, and when they finally get a big enough nest egg together to retire, they realize that they’re too old and decrepit to do anything. They can’t really travel, they’re certainly not going to hike through the mountains, and that plan they had to scuba dive the coral reefs…that ain’t happening either. After having socked away thousands of dollars into retirement at a young age, I’m a firm believer not just in long-term retirement investments, but investing for the short term as well.

When (and How) to Start Investing For the Short Term

Just recently, I wrote a post about living the life of your dreams today.  It’s definitely a good read if you have a few extra minutes, but if you don’t, here’s the gist of it:

  • The future you is laying on her deathbed…and has regrets…
  • The present you doesn’t want that to happen, so how do you fix it?
  • You need to start playing your life in reverse – what would the dying you have wanted to accomplish by 70 years old? 50 years old? 30 years old? What is truly important in your life?

Now it’s time to pair those thoughts and emotions into a financial reality.

Yes, it’d be great to live in the moment and not worry at all about socking money away for retirement, but that would just be foolish since your later years will be filled with high medical expenses and little ability to earn an income. Conversely, it’s not wise to ignore all fun today and invest solely for retirement.

So what’s the right balance?

How much should you invest for retirement? And how much should you blow on fun stuff today?

To answer this question, we’ll first have to see how well you’re doing on your retirement savings…

How Much Will You Likely Have in Retirement?

You want to know one of the biggest travesties of personal finance? It’s when you invest way too much, have tens of millions in retirement, and you never spent a penny while you were supposed to be living life!!

Want to know what typically happens to those people when they hit retirement? They go on penny-pinching because it’s all they know, they never do anything and then they die a deca-millionaire…

Some people might think that’s cool, but in my book, it’s just a waste… What good is accumulating great wealth if you’re never going to enjoy it??

Let’s figure out how much you’ll likely have by the time you’re 70 and stop earning an income:

  • Just click this link to download the Retirement Tracker Tool (you’ll probably see it in the lower left of your screen once it’s downloaded)
  • Open the excel sheet and enter how much you have have saved for retirement today (in cell G13)
  • Then find your age along the left side of the table and your monthly contributions along the top of the table and take a look at where those numbers meet.
  • The result is what you’ll likely have when you’re 70 (assuming a 9% interest rate)

investing for the short term - looking at retirement first

If the amount is more than $2 million, I’d say you’ll have enough (ie. If your number is in green…you’re putting away plenty). Sure, there’s inflation and healthcare expenses and blah blah blah…but you know what? If you’ve got 2 million bucks, I’m sure you’ll figure out how to survive in retirement. It’s time to start investing for the short term. Read on!!

(If you’re not in the green…then you might want to be a bit more cautious about buying stuff in the present. I still think you should live your life, but instead of spending $5,000 on the wave runner of your dreams, you might just need to rent one for a day instead… ;))

2) Start Making Your Financial Bucket List

Alright, so you’re plenty on track for retirement. Now what?

After years of scrimping and saving, it’s time to let loose a bit. It’s time to write down what your wants are in the near-future. You know, stuff that would be fun to have or do before retirement.

Here’s my list:

  • A house in the country with acreage — $350,000
  • New truck — $30,000
  • Cottage house on the lake — $250,000
  • An all-inclusive trip to Alaska — $15,000

I obviously don’t have $600,000 today…so I can’t possibly buy all these things, but it’s important to write them down and figure out which of them is most important to me. Then, based on my prioritization, I can figure out how to start investing for the short term to make them a reality long before retirement!

3) How to Start Investing for the Short Term

The main question you have to ask yourself when it comes to investing for the short term is, “When will I likely make this purchase?”

If you think you’ll have enough money and if you really want the item in the extreme short term (less than five years from now), then I would suggest that you simply put your money into a savings or money market account and build it up there. The interest rate that you’ll earn definitely won’t impress you, but your money will be safe and ready for you when you want to make your purchase.

If your short term purchase is likely more than 5 years away (like my cottage dreams up there), then it’s probably a good idea for you to invest your money as you save. Personally, I would invest in a simple index fund that models the S&P 500 (or a moderate-aggressive fund via Wealthsimpleget a free $50 today by investing just $100). The market will rise and fall, but on average, you should earn between 8%-10% on your money when you’re investing for stints of 5+ years.

So what about you? Are you investing for the short term? What is it that you want??

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