Planning for short-term financial goals

Kyle Harpin, CFA, CFP®
Client Needs Research Analyst

We’re often so focused on getting to our final destination that we can forget to enjoy the journey. But our short-term financial goals are what add a spice to life that makes pursuing the long-term goals even more worthwhile.

What is a short-term financial goal?

A short-term financial goal is a goal or need you’re planning to pay for in the next few years. We often lose sight of being as intentional about shorter-term wants and needs as we are about our longer-term goals, like retirement, family vacations, a home renovation, paying for a wedding, saving for a home down payment, buying a car or making another large purchase.

"The U.S. Travel Association estimates that 768 million vacation days went unused in 2019."

Many retirees struggle to give themselves permission to use the money they’ve spent so long setting aside. By incorporating a solid plan that considers different options for balancing and achieving your short- and long-term goals, you’ll be able to enjoy life now without compromising your future security. And this is valuable no matter what stage of life you’re in.

Learn more: Planning for retirement?

How do I plan for short-term financial goals?

  1. Define your short-term goal
  2. Determine how much you want to spend on it
  3. Think about how quickly you'd like it done
  4. Prioritize this goal within your other goals
  5. Contact your financial advisor to help you run scenarios and think through funding

Should I borrow or sell my investments?

In deciding whether borrowing or selling investments makes sense for you, many factors can come into play. Your financial advisor and a tax professional can help you weigh these elements to better understand the effect of selling investments versus borrowing.

Borrowing vs Selling

Borrowing vs Selling
 Favors borrowing moneyFavors selling investments
Interest rates on loan compared with return on investmentsBorrowing has a lower interest rate compared with the return on investments.Borrowing has a higher interest rate compared with the return on investments.
TaxesSelling investments will trigger a large amount of taxes.Selling investments won't trigger a large amount of taxes.
Costs and feesInvestments are in a brokerage relationship where buying and selling results in transaction costs.Investments are in a fee-based relationship where funds that remain invested continue to pay a fee.
Time horizon*Shorter time horizonLonger time horizon
Credit flexibilityHigher credit score and more credit flexibilityLower credit score and less credit flexibility

* While a long-time horizon may lean toward selling investments, there are common instances where borrowing for long time frames makes sense, such as with a mortgage. This illustrates the importance of considering all factors. For instance, mortgages generally have lower interest rates. Also given the size of the purchase, it is generally not practical to pay for a home all at one time.

What are my borrowing options?

Some of the most common borrowing options are credit cards, car loans, mortgages, home equity loans, personal loans and margin loans. You’ll want to determine which of these is the best option for helping finance your goal. For example, if you’re remodeling your kitchen, you may have thought of a home equity loan, but may not have considered if a margin loan could have been a competitive option.

A savings example

Marc and Jessica (both age 40) would like a $40,000 kitchen renovation and to retire at 65 with retirement income of $80,000. Here are some scenarios for balancing $2,500 of savings per month for them.

 A savings example chart image

Disclosure: Graphic is a hypothetical illustration of different saving scenarios.

Source: Edward Jones.

This chart illustrates three saving scenarios. The total monthly savings in each scenario is the same - $2,500. The difference: how it’s split between a kitchen renovation and retirement. In the first scenario, renovation is a priority, so $1,600 goes to that goal while $900 goes to retirement. Result: the goal of $40,000 for a kitchen renovation is met, while retirement would need to be postponed to age 66. In the second scenario, retirement is a priority, so $2,100 goes to that, while $400 is saved for the kitchen remodel. Result: the goal of retiring at age 65 is met, while only $10,000 is saved for the remodel. The goal in the third scenario: balance both retirement and renovation. So, $1,525 is saved for retirement and the rest, $975, goes to the kitchen remodel. The result: retirement comes a little later (age 65 1/2) and $25,000 is saved for the remodel.

What if I have an emergency?

Not all short-term needs are fun. If something unexpected occurs (for example a major house or car repair, medical bill, etc.) you’ll want to use your emergency fund and extra cash first. If that doesn’t cover the full cost, consider whether to borrow or sell investments to cover the remaining amount.

Once you’re past the emergency, put a plan in place to rebuild your emergency fund for the next time you’ll need it. If working, we recommend one to two months of living expenses for spending, and three to six months for emergency savings. For retirees, we recommend 12 months of living expenses for spending, and up to three months for emergency savings.

Let a financial advisor be your guide

By incorporating a solid plan for achieving short-term financial goals, you’ll be able to enjoy life now without compromising your future security. Your financial advisor can walk you through the different options for balancing and achieving multiple goals, partnering with you to determine which may be the best for you.