“If you want to move mountains tomorrow, you must start lifting stones today.”
When you’re devising an investment strategy, you’re told to consider your financial goals and their time horizons. While there is some room for individual interpretation, time horizons look something like this:
- Short-term: Five years or fewer
- Medium-term: Five to ten years
- Long-term: More than ten years
And some typical goals for your time horizons might look like this:
- Short-term: Save a 6-month emergency fund
- Medium-term: Save a 20% down payment for a home
- Long-term: Save for a child’s education
That’s A Lot of Money!
A goal is something you would like to achieve. You don’t have a financial goal of buying towels because towels aren’t expensive (meaning you don’t save up). When we talk about financial goals, we’re talking about substantial amounts of money needed to save and grow in order to achieve them.
In 2019, the median home value in the United States is $231,700. There are a variety of reasons why one should put down at least 20% when buying a home. These include: you’re more likely to be approved for a mortgage, you may get a lower interest rate, you will avoid paying PMI, and you’ll instantly have some equity in the home.
That means you will need on average, $46,340 for a down payment. Most people don’t have this kind of money just laying around. So you sit down with your CFP® and come up with a strategy to help you get there. That strategy might include creating a budget, cutting out some unnecessary spending, finding ways to bring in additional money, and choosing suitable investments to match the time horizon of this goal.
And if $46,000 sounds like a lot, wait until you start doing the calculations for sending your kid to college and how much you’ll need to retire! How can anyone possibly accumulate enough money to reach these kinds of financial goals? And these aren’t crazy, outrageous goals either. Buying a home, sending a kid to college, and having enough money in order to enjoy a comfortable retirement are things most people hope to achieve.
And A Lot of Time
Okay, that was the scary part. Here’s the good news; you have a great deal of time to accumulate the money needed to work towards your financial goals.
You do not need all this money at once. Accumulating money is a bit like losing weight. If you have 100 pounds to lose, you’re not going to lose it overnight. And you don’t have to lose 100 pounds. You can lose ten pounds ten times. Do you see? You work towards these goals, moving mountains one stone at a time, one day at a time. The sooner you start lifting (losing or saving), the faster the process goes, and the more you give time to do its thing.
Let’s look at our down payment goal using a compound interest calculator.
- We’ll start with an initial investment of $1,000
- We contribute $400 a month
- We leave the money invested for 10 years
- We input a return of 7% annually
At the end of the ten years, we have a whopping $68,286.10! More than enough for our goal of a 20% down payment on a home. We didn’t start with much nor did we contribute an unrealistic amount of money each month.
It’s Never Too Late
Is it ever too late to start moving stones? We don’t like telling people that it is too late to create and implement an investment strategy that will help them pursue their financial goals. But getting a late start certainly makes it harder.
Even if we double the numbers from above and our money has less time to grow, it doesn’t grow as much:
- We’ll start with an initial investment of $2,000
- We contribute $800 a month
- We leave the money invested for 5 years
- We input a return of 7% annually
With these numbers, we end up with $58,012.20, considerably less money when half of this amount had double the time to grow. Therefore, additional money doesn’t make up for the lost time.
So, while it is never too late to start investing, you may have to adjust your financial goals. You may not be able to pay 100% of your child’s college costs (that’s okay). We know every parent would like to do so, but you should never neglect your retirement in order to pay for college. Your kid has a lot longer to pay off their student loan debt than you have to save for retirement). You may not be able to retire as early as you had planned, or you may need to continue to work part-time for a few years.
Working with a CFP® can help you start your financial plan; whether you are nearing retirement age or have decades ahead of you. It’s never too late to start moving mountains.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. The examples provided are hypothetical and are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Paradigm Wealth Partners, a registered investment advisor and separate entity from LPL Financial.