In this article, I’ll break down the three components of saving, investing, and borrowing to accomplish your financial goals. Out of all the steps in Moolanomy’s Financial Success Plan, this step is without a doubt the most complex step. As such, I’ll keep this article at a high level, then later dive deeper into various concepts in separate articles.
Common Financial Goals
Throughout our lives, there are things that we all would like to accomplish. Many of them require a sizable amount of money. Some of these common goals include: graduate from college, buy a car, buy a house, pay off car loan, pay off mortgage, save for kids’ college, and save for retirement.
If you follow along the other steps in the plan, your finances should be in a fairly good shape and you should be more prepared to face these challenges. But exactly how can you accomplish these goals? There are essentially three ways to get the job done — save, invest, and borrow.
Borrowing to Accomplish a Goal is not the Same as Being in Debt
I can hear you saying “But I just got out of debt and now you want me to borrow?” Yes, I am. A very fine distinction I want you to make is that borrowing to accomplish a goal is not the same as being in debt. When you’re in debt and have nothing to show for it, that’s bad. But when you’re in debt for a good reason — i.e., to get your college degree, to buy a house, to start a business, etc. — it’s usually a good thing. Of course, the debt must be reasonable with respect to the anticipated return on investment. For example, going in to debt for your third Master’s Degree at a top Ivy League school is not a good thing.
What do you have to borrow? Unless, you have a ton of cash, certain goals are very hard, and may be even impractical, to accomplish without borrowing. Two good examples of borrowing to accomplish your goals include taking out a student loan for your education and taking out a mortgage to buy your home.
Saving and Investing
What about saving versus investing? Other goals on your list can be roughly separated into short-tern and long-term.
Saving for Short-term Goals
Short-term goals are things like establishing an emergency fund, saving for home down payment and other big purchases, saving for vacation, etc. Basically, you’ll need the money fairly soon (5 years or less) or on demand (e.g., for emergencies). In these instances, you should save the money in liquid FDIC insured accounts like online high yield savings, certificates of deposit, or high interest checking. This way you have easy access to you money and the principal is protected from loss.
Investing for Intermediate and Long-term Goals
Intermediate and long-term goals are things like saving for your retirement, or for your children college education. For these, you don’t need money immediately, but you need it to grow at a much better rate than what you can normally get from risk-free options like savings and CDs. In these instances, you’ll have to invest your money.
So there you have it, a 30,000 feet view of step #5: Save, Invest and Borrow To Achieve Your Financial Goals. Over the next few weeks, I’ll be expanding more on this step. In particular, I want to really dive in to the concepts of borrowing and investing.
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.