Let’s talk today about understanding the time horizon of money. In my view, one of the fundamental tenets of successful financial planning is understanding the appropriate time horizon for your money. What does that mean? What is the amount of time before you’re going to need to access your money?

I’d like to think of it as creating two or three different buckets of money. You got one bucket that has a time horizon of maybe 1 to 5 years. You’ve got another bucket that has a time horizon of maybe 5 to 10 years, and then a final bucket that has a time horizon of 10+ years. That means in that third bucket you’re not going to touch that money for 10 years. The longer it is before you’re going to need to touch your money, the more aggressive you can be with your investments. The sooner you’re going to need your money, the more conservative you need to become with your investments.

If I need money in 2 years, that would be my emergency fund. If I know I’m going to make a car purchase, the last thing I can afford is to get 2 years out in the midst of a market correction and have to sell an investment when it’s down and take a loss to buy my car. Those investments need to be extremely stable because the #1 thing I want is them to be worth at least as much, if not more than they are today.

Money I need in 6 or 7 years, I can start to take a little bit more of a cautious conservative risk, but I still have to be careful. What if I need my money in 6 years and there’s a bear market in five years? I’ve got to be confident that in 6 years from today, my investments are going to be up in value. Now then my longer term money, I can be more aggressive because I have more time on my side to recover from ups and downs in the markets.

Understanding the importance of time horizon is critical in your long term and short term planning. It means if you’re in retirement, you shouldn’t be drawing income from your risk investments. Those risk investments need to be focused out 5, 7, 8, or maybe 10 years from now; you’re not living on them. If you need money next month or next year and you’ve got to sell off investments to live on; if they’re at risk you’re just gambling. We don’t know if the market will be up a year from now. You’ve got to be living on your shorter term money, your more conservative stable investments, and leaving those risk moneys alone for growth long-term. That time horizon can benefit you in having a successful retirement income plan.