FYI FRIDAY – How should you pay for your short term financial goals?
MOSCOW – Over the course of your life, you will likely have both long-term and short-term financial goals. But how will your strategies for achieving your long-term goals differ from those needed for your short-term goals?
If you’re like most people, your biggest long-term goal is to have a comfortable retirement. And for that goal, a common strategy is to save money in tax-efficient retirement vehicles, such as your 401(k) and IRA.
So how should you prepare for short-term goals, like a family vacation, home renovations, a wedding, or a big purchase?
To get started, figure out what your goal is, how much you can spend on it, and when you’ll need the money. Even if you can’t determine an exact amount, you can develop a good estimate. Of course, the sooner you start this process, the better off you will be, as you will have more time to save.
Your next decision concerns how you save for your short-term goal. Concretely, which savings or investment vehicles should you use? The answer will be different for everyone, but you need to make sure your investments match your risk tolerance and time horizon. And you’ll want to make sure, as much as possible, that a certain amount of money is available to you when you need it.
If you are unable to save enough to meet a short-term goal, you have other options: you can borrow what you need, or you can potentially sell investments to cover the cost. How can you decide which choice is best?
To help you decide, you should first consider some of the most common borrowing options: credit cards, home equity loans, personal loans and margin loans. (A margin loan allows you to borrow against the value of investments you already own). How can each of these loans fit into your overall financial strategy? Will the repayment schedule work with your cash flow and budget?
Next, you’ll want to compare the costs and benefits of borrowing in any form versus selling investments. For example, if you can borrow at a lower interest rate than the return you think you can get from your investments, borrowing might be a reasonable choice. You’ll also need to consider other factors, such as your credit score, taxes, fees associated with selling investments, and the time it takes to pay off your debts. If, for example, the sale of investments involves a large amount of taxes, borrowing might be preferable. You will also want to determine if there is a penalty or high costs associated with selling investments. Also, if you have a long-term horizon for a loan, you may want to sell investments to avoid paying interest for a longer period, and therefore increasing the overall cost of borrowing. Finally, keep in mind that you may have put together an investment mix designed to align with your goals and risk tolerance. If you had to sell any of these investments to meet short-term needs, you should consider the need to rebalance your portfolio to maintain your desired asset allocation.
As you can see, there’s a lot to think about when it comes to paying for short-term goals. But by carefully weighing your options, you can make the choices that are right for your needs.
For more information, call Financial Advisor Edward Jones Beau Melton at (208) 882-1234 or walk into his office at 609 South Washington St. Suite 203 Moscow, Idaho 83501