Skip to main content

Time Horizons for Investing in your Personal Finances

One of the most important skills, indeed, the most important skill when it comes to personal finance is the simple rule: Spend less than you make. This is a simple rule that works for handling all personal financial situations. If applied correctly and the wisdom that it imparts is correctly understood, it can determine the course of your financial future.

Personally, I am continuing to work on ways that I can spend less than I make. For this to happen, I need to accurately understand all of my expenses and all of my sources of income and determine how I can track it and ensure that I take steps until my income is larger than my expenses. I have reached this point many years ago and the progress has been positive since then and I consider myself lucky.

Now, I am proceeding down the path and I realize that there are two aspects to this constant quest--a shorter term aspect which consists of very specific steps that can be taken in the very near term. Then there is also a longer term view of this goal that I am currently involved in which causes me to do quite a bit of head scratching as I try to figure it out.

The short term and long term are different for everyone, so I understand that these posts will not be applicable for everyone, but as with nearly everything in personal finance, this is personal. I find that anything in the next month is short term. Our year is divided into twelve months, and personally, I find that this length of time is how far out I tend to make my plans for work, finances, and social life.

The long term for me tends to be between 12-24 months. This is because it becomes extremely difficult to forecast what will happen in my life in terms of life-changing events as well as with the economic situation more than a year out. I think that this is true of most people as well.

I personally believe that the likelihood that forecasts turn out as expected approach about 25% when they are for periods greater than 2 years into the future. For me, for that time horizon, or, put another way, this time tends to be an utter waste of time to do forecasting. Additionally, this time horizon tends to be the amount of time I have set aside within my emergency fund. That also provides a great deal of stability within my forecasts. After a disaster, I would have that period to be determining next steps.

The value of forecasting is that you can construct various worst-case scenarios and determine what your possible reactions would be in the short and long term:
- Job Loss
- Health loss/Injury
- Minor Car/Home Repair
- Natural Disaster

All of these scenarios (and probably more) should be considered and planned for both short and long term. But forecasting doesn't stop there; planning for both the short and the long term can impact your investing as well. Furthermore, the time horizon that you're focused on has a dramatic impact on the types of things that you will be doing to improve your overall financial situation, which can include a lot more than just your investments. I'll talk about these in two subsequent posts about short and long term plans.

Comments

Popular posts from this blog

Do Better With Your Time

Recently, I've been extremely busy with some work commitments. The interesting thing for me is that this increased work activity has really helped crystallize some of my feelings with regard to time. And these ideas are a critical part about my view on personal finance. I'm curious to know if others feel similarly. Time is money. That is, Time, in some way, contains energy. Money, is also energy. In the act of working, I am able to compound and increase the amount of money that I have. I am exchanging my time and effort and thought which are components of my work, for the productivity that I produce. And this production gets me money from my employer. However, the first dollars that I make each day, week, or month are the most valuable. Then the ones that I make at the end are the most valuable. (Forget about taxes for a minute.) The reason is, the first ones help me have a place to live and food to eat. And the last ones are the ones that I can use to really improve my life lo...

Awkward Family Money Situations

I was about to write this as a comment, but its quite long and brings up a ton of issues so here goes. First, check out  <a href=" http://hereverycentcounts.blogspot.com/2007/06/money-and-etiquette-why-are-important.html ">this story at here every cent counts</a>. Now on to my response. I am just mortified by this story. I cannot even imagine that people with kids would expect someone in college to pay for their own dinner. I'm assuming that this is an aunt/uncle/great aunt/great uncle situation and that you are a young college student in late teens, early twenties with no full time job. All of my answers below are based on those assumptions. If that is the case, they should *splurge* the 20 bucks for dinner. They are an adult here and as much as I believe that you should be independent, while you are in college and struggling for money, you should be treated on an occasion like this. Big Question: How do your mom and/or dad and/or other immediate family ...

On Buying a Lifestyle...with a Fixed-Rate Mortgage

Despite all of the back and forth about sub-prime mortgages and the housing bubble, I am feeling just fine. The reason is that when purchasing, I followed some old advice: Don't expect to flip. In general, I've been told by many people that you shouldn't buy a home unless you plan to hold on to it for 7 years or longer. If the market does well and you decide to sell, fine. But if you want to be sure not to lose money, don't buy something that you only want for a year or two. I've been in my current location for more than 3 years. I like it. And I have no intention of leaving in the short or medium term. It seems to me, that real estate, like any asset class, has its ups and downs. But as a practical point, I don't look at my home as an asset per se. Rather, I consider it to be a fixed expense that I need to survive, much like food and water. Therefore, as long as the payment is reasonable and it functions to keep me warm and sheltered and comfortable, that is a...