Do you pay any attention to the color of the bananas you pick out when you’re at the grocery store? It’s probably something you do without even realizing it. You know that if the bananas you pick are a dark shade of yellow when you place them in your grocery cart, then you might have mushy bananas not long after you bring them home. And you also know that if you intend to bake banana bread the next day, then you probably don’t want dark green bananas because they’ll still be rock hard when you are ready to start baking.

You know exactly what you need and when you’ll need it and base your purchase on that timeline.

So why is it that we’ll take timing into account when making the most trivial of purchases – like buying bananas – but we’ll often take a less thoughtful approach with our investments?

In that way, we can be pennywise and pound foolish.

The Dollar Build investing timeline

Are you putting more time into picking the right bananas than the right investments?

We intuitively ask ourselves if the bananas we are buying will be ripe at the appropriate time, but fail to plan ahead or consider the big picture when we impulsively withdraw money from a high-risk mutual fund before it’s had time to recover from its designed volatility.

The problem is that we don’t always invest with life’s timelines in mind.

Financial Considerations for Each Stage of Life

financial considerations for life stagesMy recent interest in planning for life’s different stages has largely been inspired by recent episodes of the Meaningful Money Podcast. During the current season, host Pete Matthew has committed to breaking down what he calls “life stages” and explaining how your financial considerations should evolve as you pass through those stages. (If you haven’t given his podcast a try, check it out. There’s something for everyone. I really think you’ll like it!)

The real beauty of the Season Seven theme is that Pete provides listeners with information catered to their life in the way a financial advisor would counsel them.

I want to take some of the concepts that Pete has shared in his podcast, and share them with you to help you think about what investment strategy is best for you. The process that I’ll outline is one that I’ve developed over the last few years. I hope you find it helpful!

To illustrate my approach to life stages, I’m going to refer to certain Vanguard investment products. For the record, while Cato and I both think Vanguard is basically the best mutual fund and brokerage out there, we do not have a financial relationship with Vanguard. I am merely using their products a reference, but we aren’t getting paid if you go sign up for a Vanguard account.

Step 1. Decide What You Are Saving For

I’m going to assume you’ve taken quite possibly the biggest step of all – starting to save. Great work! Now, let me ask you – what are you saving up for? You’d probably be surprised at how many people who are saving money don’t really know what they are saving up for. On top of that, roughly 40% of those folks have no idea how their investments are allocated.

By burying our heads in the sand when it comes to what we want and how our investments will get us there, we really leave much of our financial fate to chance.

Instead, we should ask ourselves: “What am I saving/investing for?”

Here’s a list of some common reasons for saving and/or investing:

  • Purchasing a first home
  • Upgrading to a nicer home or one better suited for your needs
  • Retirement
  • Emergency fund
  • Long-term pre-retirement wealth
  • College savings
  • Fun Money (e.g., discretionary money to be used for travel, a new car, home improvement projects, etc.)

As you might imagine, each of these situations comes with its own timeline. That timeline should play an important role as you select your investment vehicle and portfolio allocation.

After you’ve highlighted your specific reason (or reasons) for investing, you’ll want to achieve the right investment balance for two primary factors:

Growth and Access

Naturally, we want any money that we save or invest to grow. But we also want to be able access that money at a favorable position in its life on the market. That brings us to step 2.

Step 2. Establish Timelines for Your Saving and Investing Goals

If you are twenty years old and your goal is to buy a house in 15 years, your approach to investing would probably be much different than if you wanted to buy a house within three years.

If you want to start a college savings plan for your newborn child, you wouldn’t start by buying 6-month CDs. You’d purchase a fund that is meant to be accessed in approximately 18 years.

The goal is to maximize your return on investment during its growth stage, and then back off aggressive, potentially volatile investments as you approach the access phase.

What is the easiest way to accomplish that?

Step 3. Select an Investment Product that Fits Your Timeline

Let’s say one of my goals is to buy a cabin with a majestic mountain view in 30 years. Something like this…

Dollar Build

Because it’s currently 2017, my plan should take into account that I won’t need to access my investment funds until 2047. Here is an option I might consider:

Vanguard’s Target Retirement 2050 Fund is designed to takes its biggest risks in the early years of the fund. But as I get closer to my access date, the fund is designed to automatically become more conservative.

The Dollar Build investing timeline

This concept is frequently used for retirement planning, but it can be used for many other life events. The beauty of this mutual fund is that it doesn’t require me to monitor or manage anything. The fund automatically becomes more sheltered to volatility in the market as I get closer to shopping for my cabin.

What About an Emergency Fund?

Let’s say you are looking for an investment vehicle for your emergency fund. In this case, your timeline is “any second,” so trying to maximize growth potential would be at odds with your need for access at a moment’s notice. For that reason, you might consider some type of money market fund, like Vanguard’s Federal Money Market Fund.

The Dollar Build investing timeline

Notice that the risk is extremely low due to the short-term timeline, and your need to quickly and easily access funds.

What About Saving for a Fun Purchase?

Let’s say you’ve funded all of your immediate investments (e.g., 401k, IRA, college savings, etc.) and you still have funds that you consider your “fun” money. If you have the poise not to panic over the highs and lows that come with a volatile investment product, then you’ll probably want extremely high upside in an investment.

Fun money generally has a timeline of over 15 years since you shouldn’t need to access the funds at a specific time for any specific reason.

Furthermore, fun money typically will have risks much higher than “purposed money” that is aimed at a direct goal.

So, let’s apply the three-step process to this particular situation:

Step 1. Decide What You Are Saving For

This is your “fun” money. You are in a position where your basic expenses are covered, your other investments are funded and you have more money left to invest. That’s a great position to be in! For this example, let’s say you are comfortable with a high-risk, high reward type of investment to use for a future vacation (or two if things go well).

Step 2. Establish a Timeline for Your Saving/Investing Goal

You won’t need the money any time soon, so you set a timeline of 15 years or longer.

Step 3. Select an Investment Product that Fits Your Timeline

There are several products that could fit your risk tolerance and timeline. Here’s one example of a financial product that would serve the purpose of “fun” investing:

This type of fund essentially aims to invest in companies that haven’t made it big yet, or even medium for that matter. Becoming a successful company takes time, and this fund would be consistent with an individual who wants incredibly high upside and is willing to wait for it.

Vanguard’s Small-Cap Growth Index Fund Investor Shares doesn’t have decreasing risk levels that taper off as you approach a designated date or life event.

The Dollar Build investing timeline

But that’s okay, because your fun money isn’t intended to go toward a crucial life event. If you feel like transitioning your fun money towards a life event, then you can stop funding this product and start calming it down by adding in more large-cap companies to the portfolio.

A Few Final Thoughts

It is understandable when people get manically excited about investing and go invest one of the first products they feel good about. By doing this though, they may be designing their future in a way that contradicts their life’s timeline.

Remember, there are thousands of different mutual funds out there. While many of them are plenty diversified, they aren’t all set up to work in conjunction with your life goals. So, make sure you consider why you are investing and determine when you want these goals to come to fruition. Knowing that information will help you select an investment product that suits your investing objectives.

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