How to Allocate Your Money
Travis Gatzemeier, CFP?
I help stock compensated professionals and small business owners build a tax smart plan for financial independence | CERTIFIED FINANCIAL PLANNER? Professional | Founder of Kinetix Financial Planning, LLC
When allocating money, most people think about their mix of stocks and bonds.
While your allocation across different asset classes is important, I believe it should be a byproduct of the different timeframes within your financial plan.
Traditional financial planning puts most of the emphasis on long-term investing.
"Look how big your pile of money can grow to after 20+ years..."
Sure, everyone wants a bigger pile of money, but most of the folks I work with have multiple goals and timeframes before 20+ years down the road.
They also want financial options in the future, not a traditional retirement.
This is why I have a concept of long-term and short-term money that I discuss with my clients. We literally put these words into our financial plans.
It can be difficult to determine how to allocate your money when you have short-term goals, long-term goals, and who knows what in between.
So, I want to cover a framework I use with clients to ensure we maximize their financial planning between now and the future.
Short-term money
This money has a (mostly) known expiration date within the next 1-3 years.
These are all goals for which you are pretty sure you need money, and the financial cost is known.
Because you have a short-term timeline AND a known cost, the goal of this money is certainty/stability/liquidity. The goal IS NOT a big financial return.
With short-term money, it is best placed in cash or cash equivalents like money markets, high-yield savings, or short-term t bill funds.
Mid-term money
I'm going to tell you right now...
Almost everyone, including financial advisors, overlooks the "mid-term " planning timeframe.
This is money you (might) need in the next 3ish-10+ years.
Most of the time, you might not have a clear goal but rather ambitions for future possibilities.
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This middle-term timeframe is all about building flexibility between now and whenever.
Since the time horizon is generally 5+ years, you can start to incorporate risk so the money can grow while still maintaining some stability.
Your mix of stocks and bonds for the midterm bucket will depend on your time horizon, risk tolerance, and liquidity needs.
This money is generally best placed in a brokerage account so it can be invested, but not inside a retirement account so that it can be accessed without penalties.
Long term money
This is the money you don't need for 15+ years.
Your long-term money can support your long-term goals and wealth building. Generally, for most people, this is becoming financially independent.
With long-term money, you don't plan on needing it for decades, which means it can be invested most aggressively.
In other words, you may own assets that have historically had more short-term risk but also higher long-term returns that have rewarded investors for the risk.
Depending on your risk tolerance, this could mean a higher allocation to investments like...
Depending on how much you are saving and need to invest, this can be a combination of retirement accounts and brokerage accounts.
Aligning your investment allocation to your expected timeframe can significantly improve your financial planning.
It's all about matching the right investment with the right (estimated) timeframe.
Investing by timeline gives you short-term stability and mid-term flexibility, which allows you to sleep at night without disturbing your long-term investments.
Go invest in yourself,
Travis Gatzemeier, CFP?
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