All investments and savings take time to build.

However, the rate at which it builds and the risk along the way can vary greatly, making different forms of saving or investing better for different circumstances.

To optimize your financial success, you need to align different portions of your wealth with different time horizons.

What Is a Time Horizon?

For example, if you are a 30 year old saving for retirement, your time horizon may be 30 or 35 years.

If you are a 40 year old saving up to buy a house, your time horizon may be 5 years.

If you are a 24 year old saving for a car, your time horizon may be 1 year.

Each of these time horizons presents a unique set of goals and challenges that we need to tailor our strategy to.

Keep in mind you can have multiple time horizons for different groups of savings. Ideally, each of those groups would be tailored to its unique time horizon.

How Does a Time Horizon Affect My Goals?

The primary way a time horizon affects your goals is through risk level.

Every investment has risk, but the key is to 1. ensure the risk is worth it (i.e. there is enough upside and 2. make sure you have time to take on short-term risks.

For example, if you are going to be saving on a time horizon 6 months from now, you don’t have very long to weather downturns. A downturn in your investments could mean having less money when it comes time to liquidate than you did to start.

Alternatively, if you are saving on a time horizon 20 years from now, who cares about short-term fluctuations? Your goal should be to maximize growth during that time to ensure that by the end you have more than you started with.

Another effect of your time horizon is on your desired liquidity.

Liquidity defines how easily your investments/savings can be turned into cash that can be spent.

Let’s use the same two scenarios.

If you are going to be saving on a time horizon 6 months from now, you need your money to be ready to spend quickly. It can’t be tied up forever or else you will be penalized when you want to spend it, or maybe unable to spend it at all.

If you are saving on a time horizon 20 years from now, it’s okay if you can’t access it immediately.

Where Rubber Meets the Road: What To Do With Your Money Based on Time Horizon

If your time horizon is:

• <1 year: High-yield savings account

  • An HYSA (high-yield savings account) offers guaranteed returns (usually ~4.5%) with high liquidity.

  • You can pull out your money/gains whenever you want. You are just generally limited to 3 withdraws per month and waiting 2-5 business days to receive your money (standard banking waiting period).

  • Avoid investing in stocks as shares held for <1 year are subject to MUCH higher taxes.

• 1-5 years: Bonds or HYSA

  • Bonds offer guaranteed returns (currently ~6.5%) but are tied up for longer, usually 1-5 years. They are a great low risk option, especially when nearing retirement.

  • Again, an HYSA offers solid gains with high liquidity, but it isn’t the maximum return you could generate over this period of time.

• 5+ years: Stocks or real estate

  • The stock market is unpredictable in the short-term, but has averaged ~10% returns over its 150+ year history. If you hold onto stocks for a long period of time, you will give it time to average out. I always stick with index funds like VOO to track the overall market for more predictability and less volatility.

  • Generating returns similar to stocks, real estate can be incredibly powerful for building wealth. However, it can be more time intensive and risky due to holding onto a single physical asset.

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Before You Go

This is just a free tool available to everyone, no strings attached.

Ideally focused on people who have not yet set up a 401k, the 401k Kickstart aims to give you the fundamentals of a 401k in an easily digestible package.