How Should I Save/Invest For Short Term Goals? [PODCAST]

Andy Flattery: [00:00:00] [00:00:00] So welcome back to Catholic money mastermind. My name is Andy flattery. I'm a certified financial planner and owner of simple wealth planning. I'm here with Michael Acosta, who is also a CFP. At consolidated planning, and today we're tackling the issue of how to invest for the short term, how to handle short-term savings and investments, Michael, first off, how are you?

Michael Acosta: [00:00:25] doing great. Thank you for having me. I greatly appreciate this opportunity.

Andy Flattery: [00:00:29] Yeah. I thought maybe we should at first off, just talk about why we're talking about this, this issue. I mean, it sounds kind of basic and maybe even sounds a little bit boring, but I thought we could just open with the reason for the topic itself. And so Mike, I'm gonna throw just a couple of things at you and I want to hear your thoughts.

So, you know, to hear today in December of. It's December of 2020. I don't know when we're going to run this. It might be a ways out, but the [00:01:00] 10 year treasury 10 year treasury bond is trading at a, sorry, yielding 0.92% or 92 basis points today. So that translation it's yielding less than 1% to tie up your money for 10 years in what many considered to be the safest investment in treasury bonds.

And so that's kind of the biggest thing and maybe the biggest reason why it's people are just finding, finding it so challenging to, you know, find a place to park your, your money for the short term. My Michael, your thoughts.

Michael Acosta: [00:01:34] Yeah, no, I, I agree. It's, it's, it's kind of, I don't want to say frightening, but. It almost stumps you a little bit because you know what, the 10 year treasury being kind of that safe place to park your money, the conversation as well. How do I do that now? When I'm getting less than 1% and not even close to keeping up with inflation, you know, traditionally wouldn't doing what this conversation with clients.

It was, you know, we could, we could look at [00:02:00] putting. Most of your just emergency fund or life events fund, whatever term you want to use, or however you coin that phrase into a high yield savings account, whether it be, you know a traditional institution or anonymous non traditional institution where there's no brick and mortar, that's offering one and a half to two and a half percent, I think earlier this year in 2020, and about January, February It was American express who was offering about two and a half percent yield on their high yield savings account.

So a lot of, a lot of clients were, were going that way just to earn a little bit more without taking any risk. And obviously most planners are advising, you know, that emergency fund that life events fund should have as much reduced risk as possible because you don't want to have, you know, the potential for principal loss.

So it's how do we now. It advisor, how do we now tackle this question of, well, where should I be parking my money in the short term? And for me short term is really, you know, one to three, one to five years. And those [00:03:00] funds could be used for various various means. Whether it be just, you know, what, standing an unexpected life event, down payment on the purchase of a home money towards, you know, starting a business or whatever it may be.

And, and so, you know, if, if the 10 year treasury is not the solution than what is.

Andy Flattery: [00:03:17] Yeah. And the other thing that I think about too is you know, unfortunately like some financial advice, it probably used to be so simple for, for a good reason in that you know, frankly, you could just save your money in, you know, in currency, you know, maybe it was the dollar, right. That our grandparents would have.

You know, the, the, like the attache says they would have tucked in underneath their mattress or something like that. And, and there was a feeling that it might hold its value over time. Or of course you could simply open up a savings account and put your money in a savings account at the bank. And that was very simple, prudent sound advice.

And I think what has happened is people have looked [00:04:00] for other, other ways to save because maybe they've. They've found that advice that used to be prudent to not be the way forward, unfortunately. And so, so like, I think you know, you might've seen in and you still do, of course people would look to their home.

As another savings vehicle, right? You can put more money in, in your house and over time, you know, you would hope that your, the value of your property would appreciate at least with inflation. And that's been something that's worked at least here in the United States for a few decades. And I think the other thing that I've been seeing more to now, Michael, is, is people are also just looking to the markets as another savings.

Vehicle. So of course that the bond markets and even the equity markets as a place to park money, not just for the long-term, but a as a short term savings mechanism.

Michael Acosta: [00:04:52] Yeah, no, I would agree. And I, I would even say this year alone, probably more so within that millennial space we're [00:05:00] S we're seeing more and more clients or young professionals want to jump into the market, especially once we got near the bottom. You know shortly after April and into may and started to rebound, everyone was talking about, you know, hot stocks that should be purchased that are now at a, at a deep discount and, and allocating funds to the market are looking at micro investing, using some, some form of app on their phone.

Th th that almost gamifies the experience for investors and, and the real question is, does that really move the dial? Is that the most prudent approach or the most efficient approach? And is it really going to make a long lasting impact in the interim? To your point, you know, that, that traditional approach to financial advising, opening up a savings account using CDs or bonds, whatever it may be, that that still holds true, but we're dealing with, I feel, and this is my personal opinion, different eroding factors today than our parents and grandparents had to deal with [00:06:00] during, during their time growing up in the same age bracket.

And some of those things really result to one, the improvement and advancements of technology that have now become an integral part to our daily lives, but also just inflation as a whole. You know, just speaking with relatives and looking at, you know, the prices of homes, the prices of cars looking at, you know the price of a gallon of milk or a loaf of bread and, and what.

The average annual income looked like 30, 40, 50 years ago compared to now, and just seeing how things just aren't stacking up and moving in lock step. So it's, it's one. How can we advise or how can individuals take it upon themselves to be proactive and continue to, you know, build liquidity and put it in a safe, safe location.

But. Also addressing the question of, well, if I'm putting this money aside for, for a, what if moment or for unexpected life of that or treating it as an emergency fund, should I really be expecting to earn [00:07:00] anything on return? Because the, the price of, of, you know, no principal loss is, you know, that, that reward of earning something in the market.

So it's really trying to manage the behavioral or psychological approach and the meaning behind what we're really doing and what the purpose is for these funds.

Andy Flattery: [00:07:20] exactly so. So let's get into it. I, you know, when, when I think about the short term, there's maybe a couple of ways to think about it. Typically I, I kind of, and I'd like to hear your thoughts too, Michael, I kind of bucket it a few different ways. I think about the short term is maybe five years in less, not that there's something super scientific or academic about.

Five years. But you know, in my mind it seems like over the next five years, that's a period of time where I can kind of envision what my life might look like. And, and I don't want to take risk is some sort of investment that could lose a significant amount of [00:08:00] principle. If I need those funds within five years.

So that's kind of how I think about, I don't know if you have a different way of viewing the idea of short term savings and investing.

Michael Acosta: [00:08:09] Yeah, no, I agree with you and take a similar approach using buckets, you know, short-term mid-term and long-term, and, and defining that range for me, short term is similar to yours, one to three or one to five years. And I think it really just depends on one. The purpose of those funds as well as the time horizon of the client or household.

But in, in, you know, just rule of thumb, usually short term is going to be between that three to five year range in my personal opinion.

Andy Flattery: [00:08:39] Yeah, that's good. So here's kind of where I've landed with this. At least here in 2020 what, what I kind of look at the. Well, the opportunity for the clients that I work with at least is to maybe think of it in terms of like a barbell approach. So if you're as, you know, especially like a young [00:09:00] household, that's trying to do a couple things at once, have liquidity to live their life and, and to save for things that are important to them.

But on the other hand, they also want to build wealth for the future. I think about you know, the kind of the kind of really. Conservative one side of the barbell, which we want to be very safe and protect principle. And then the other side of the barbell is you know, maybe quite aggressive depending on what type of investor you are.

But, you know, in terms of that conservative side of the barbell, We're pretty plain vanilla over here. It's you know, it's CDs and savings accounts and money markets, market accounts. What we're finding here, at least in Kansas city is that there's a couple of credit unions actually that have kind of attractive rates.

If you know, like your local area, it seems like the credit unions. Have been a pretty interesting way to go here in terms of like money market and CDs, the rates, but it's not a sexy story to tell it's you know, pretty, pretty boring, but that's [00:10:00] kind of the way we've landed on where you should be parking cash for the short term.

So like, you know, saving for your next house purchase saving of course in an emergency fund, which everyone should have. Those are the, those are the areas that we're, that we're leaning on right now. What are your thoughts?

Michael Acosta: [00:10:17] No, I, I agree 100% and, and I would say our, our approach and philosophy is very similar to that bar bill approach. But you know, using. Local credit unions, they are tending to have higher, higher rates or, you know, I guess better advantages to their solutions or products or accounts versus streamlined or mainstream institutions.

Also. Just letting clients know, you know, from a process or prioritization standpoint that that life of insulin should be number one. And secondly, from an asset location standpoint, liquidity is key, especially for young professionals. You know, I firmly believe that between the age ages [00:11:00] of 18 and about 35.

Those are going to be the, the, the highest liquidity need years of, of an individual's life. There's so many different milestones that are being achieved. And you know, traditionally it's been. Graduate from college, get your degree, get into a good paying job and just automatically start aggressively putting money towards your retirement, which I, which isn't bad advice, but is it the better, best answer if you will, for everybody?

And I probably believe it's not. And so with inflation being an issue with, you know, the average annual income, not keeping up with inflation. The real question becomes well, how can you balance both? So for me, it's, it's taking that three bucket approach that, that short-term bucket. I'm telling clients that we're not chasing yield here.

And really we're never chasing returns because we have no real control over that. All we can really control [00:12:00] is a risk exposure, as well as how much we actually put back on our balance sheet. So I'm more excited and more motivated to tell clients, Hey, let's, let's just focus on putting 15 to 20% of your annual gross income back on your balance sheet.

And just keep it very elementary and then having the conversation of asset location on top of that, once we've created good systematic habits. And so asset location becomes a question of, okay, well, do we have three to six months worth of living expenses in our life events fund or emergency fund?

Whichever term you want to use? If yes. Okay. Well then where's our tipping point or our port over point. And once we hit that pour over point, let's start capturing some of that stuff. Village into a midterm bucket where we're going to take on a little bit more risk exposure. And maybe we enter the market and, and, you know, be somewhere in alignment with like 60% equity, 40% fixed income or 50, 50, or 40 60, just depending on the purpose of those funds.

And just continue to [00:13:00] build that liquidity. Cause there's no. Problem with building that liquidity. And as far as the long-term bucket, you know, being that retirement aspect, we can allocate funds there, but I don't think that that needs to be your end, all solution. End all be all. It's where all of your discretionary cash flows is just going into pre-tax 401k or 403 B or, or anything to that expense.

And like I said, these are very generalized opinions, but I think at least for the short-term. You know, savings, CDs, money market. And then if we're on the closer end of a five-year range, if we have the three to six months worth of living expenses, set aside at no risk funding, then let's start looking at taking on a little bit of risk just to increase our odds of return on investment.

Andy Flattery: [00:13:51] okay. Yeah. So I liked that. So I noticed how neither one of us didn't have said anything about even like a bond fund at this point, too. Both of [00:14:00] us have kind of stuck with, have stuck with kind of banking solutions. Is that kinda where you're at?

Michael Acosta: [00:14:06] Yeah, I mean bonds haven't at least in my opinion, the last. One and a half years, haven't really been a great solution with, with the downward spiral of interest rates, in my opinion. It's, it's, it's just not been favorable. And in all honesty, I feel like they've kind of lost favor and more people have been flocking to, to, you know, equities in replacement or I guess, safer equities, if that makes any sense.

Cause it's kind of ironic, but say for equities.

Andy Flattery: [00:14:40] I agree. I want to throw just kind of two other things out there just to make sure people are listening, Michael, because inevitably this is going to make somebody really mad. And these, and by the way, I should've said this upfront and maybe I'll add a preamble at the beginning, but none of this is any sort of personal recommendation, but since I know it's going to come up, I at least want to [00:15:00] add kind of these two conversations into the mix as well.

The first one is whole life insurance. And the second one is Bitcoin, because I know someone out there is thinking about this and somebody out there is, is wanting to do this. So I think Mike, my thoughts on whole life insurance are much more moderate than than maybe I've seen kind of in the extreme.

So you have kind of the extreme financial planner who will say that there's never a use for whole life insurance and you should avoid it at all costs because it's always Being sold with, with unethical sales practices. And then on the other extreme, you have people that want to use it for everything.

And I'm just kind of in the middle thinking, well, there are certainly probably uses for whole life insurance. But of course, as we all know, a lot of people don't understand the product and they don't use it in the way that maybe it should be. And so just with that, with that first piece, Michael is his whole life insurance, a good solution for short-term savings.

Michael Acosta: [00:15:57] My personal opinion is that it [00:16:00] honestly depends. And, you know, I mean, you know, just as well as I do financial planning, comprehensive financial planning is more of an art than a science. And every advisor is going to have a different flare different philosophy based on their personal experience, as well as their working experience over time.

So personally I think there is a time and a place to utilize it. Is it for the short term, I find it hard if you're using. Sure traditional whole life insurance, not like a universal life or variable universal life, but just traditional whole life insurance. I find it hard to say that in a one to three or one to five year period, that whole life insurance is the most efficient vehicle that can be used.

Only because the cash value in the policy is not going to grow significantly enough for it to be worthwhile from a accessibility standpoint, because there is death benefit or insurance tied to the solution or the [00:17:00] vehicle. There's a cost of that, that, that, that death benefit or insurance coverage. So it's not really until after seven to eight years where you really start to see the cash value grow in a meaningful manner, unless an individual takes the time to over fund the policy without causing it to Mick .

Andy Flattery: [00:17:19] Let me just jump back in because you just cut out. I agree. And the only thing that I will add to that is in, in my experience, the people that I have met that have been able to successfully use permanent insurance in unique ways, like for example, borrow against it, to use for different savings needs.

Are actually financial people themselves. So it's like insurance agents that have kind of really understand the products and really understand how to, how to utilize them. Those are the people that I think really thrive with this and really enjoy using it. Cause they're kind of drinking the Kool-Aid more often than not though.

I [00:18:00] find many people that are. Bought these products. And they, and they really do not understand how to use them in the way that maybe they could be. And so I think that's, that's really the issue here. Getting back to your point about financial planning.

Well, cool. And so the second thing. That I wanted to bring up just to make everyone mad. It was of course, just Bitcoin, because inevitably there's someone that's probably using Bitcoin as a short term investment need and maybe, you know, in a year where Bitcoin's going up, they think they're pretty smart for that.

And I just, I think the only thing that. We can say about Bitcoin or that we should say at this point, is that for all the things that it is and that it isn't, and we don't have to have a debate here, but it certainly is a, is probably not a conservative short-term savings vehicle. And I'm just going to leave it at that, Michael.

Michael Acosta: [00:18:49] Yeah, no, I agree with you 100%. I think there's still a lot of unknowns to just cryptocurrency and Bitcoin as a whole and with the volatility around it [00:19:00] and all the speculation and where, you know, investors think it's going to go. And even specialize in that space I would say that that's not a sound or prudent area to put that short

Andy Flattery: [00:19:11] sure. For sure. Yeah. I mean, one of the, one of the analogies I make is like you know, if you think of something like Bitcoin as a speculation, and maybe some people would argue with that, but I'm going to call it a speculation. You can think of a speculation is like driving a hundred miles an hour down a residential street.

Will you get to your destination quicker? Quicker than you would have, if you would have driven 20 well, probably and potentially, but is there potential for causing a lot of damage in the meantime and and, and being reckless? Definitely. And so that's maybe, you know, the way I would think about, think about it there, but it's easy to kind of get sucked into that when you know, in a year like 20, 21, a lot of stuff, like Bitcoin

looks quite interesting.

Michael Acosta: [00:19:58] No. No, of course it is. And it's [00:20:00] not just that. It's interesting. It's, it's a new flare it's, it's, it's, it's a new trend and it's not that it, to your point that it can't work or that it won't work at that point, it becomes probability and a matter of being right. And if you're right once that's great, but then you have to be right a second time and then you have to continue that trend of being right before it all implodes, because one.

One, one instance of being wrong, kind of negates everything that in a sense. So, you know, for me, if a client wants to get into crypto and and alternatives like that that's fine, but usually it's a small percentage of Cut more or less play money in, in my mind for them to kind of do what they want with

Andy Flattery: [00:20:37] Well said. So that's a good segue to the kind of third segment here that I want to do. And that is where can you go wrong? And this again gets into kind of the purpose of why we're doing this in the first place, but where can you go wrong? You know, one of the first. Things that comes to mind here in this relates to the whole kind of crypto [00:21:00] currency conversation.

Is that. You know, as financial planners, like a lot of times I like to take the financial planning perspective on like how to, how to approach this, because I've seen in 10 years of working with clients, just how much the market and what's going on in the market environment of effects, how people want to make decisions on even something like short-term investing.

So I'll give you an example, which Michael we've talked about before, but. You know, early in my career like 2010, 2011, this was like after the 2008 financial crisis, what I discovered during that time was a reluctance to put any, any money at all into the market. Even if it was for like a long-term investment, there was just too much Fear

when even though in retrospect, we know of course that would have been a great time to do it. And now here in 2020, I'm actually seeing the [00:22:00] exact opposite and there's maybe a temptation to leverage up as much as possible and and be very illiquid and have kind of everything. In, in a, you know, for something like the stock market, for example.

And so that's why I think just taking that kind of financial planning perspective on this is a, is a really important way to think of it.

What do you think, Michael.

Michael Acosta: [00:22:22] no, I agree. I to be comprehensive and, and treat it, treat it like medical professionals do when you go in for your annual physical, when you go in for an annual physical, they're looking at every aspect of your health, running different tests from a lab work standpoint, checking different vitals, all that.

They're not just staying at the surface level or staying with the trends of what they're seeing the most stuff. So same concept when it comes to our, to our finances. And, and I think my personal bias is that some of what you experienced, you know, 10 years ago versus today, has to do with, with the psyche or the, the, the, the mental psychology of, you know, [00:23:00] What type of experience was that investor having at that time?

Well, if it was somebody who was experiencing or started their investment journey during a bear market, then I feel like based on behavioral finance, they're a little bit more pessimistic when it comes to the stock market. And when things kind of turned sideways earlier in the year, there were probably like, okay, here we go again.

And, and got a little, you know, flustered or emotional. Whereas with investors that have started their investment journey over the course of the last three to five years, or even, you know, the last eight years they've been in pretty much a bull market, that's been fairly consistent. And so they're a little bit more optimistic knowing that, Hey, this is an opportunity to maximize my growth potential because I know.

Even though they may not know that the market's going to rebound and there's an opportunity to increase my return on investment. And so I'm willing to take that risk with being a liquid and maybe overextending or overleveraging myself with not having that short-term that we've discussed. You know, on this podcast,

[00:24:00] Andy Flattery: [00:24:00] yeah, well said another one that comes to mind. Just kind of through my personal anecdotes is maybe just picking on us men in general. I think a lot of times, and, you know, as men, we, we want to burn the ships. You know, men want to take risk. And and there's nothing wrong with that. You know, like you're, you, you have to take risks to a certain extent, but but I think.

W what that sometimes results in is just not having enough cash on the sidelines, not having an emergency fund being, having too much of your net worth in, in risky investments. I think probably could be seen as like a man thing. Whereas women might be a little bit of the opposite where they like to kind of security or the kind of conservativism of having more cash on the sidelines.

I don't

know if you've seen that.

Michael Acosta: [00:24:48] No, no, no. I agree. And I would even take it a step further that if it's single men versus single women versus married, married men versus married women. And I think as men in general, We, [00:25:00] we fall victim to like a confidence bias, especially when we're around other men to where we start to over-exaggerate, you know, how, how maybe athletic we are or were, or, you know, how smart we are or how great we are at doing certain things.

We, we tend to exaggerate that and, and overextend ourselves. So when we allow those emotions and those feelings and those actions to kind of roll over into personal finances it, it become, can be problematic in the interim. And you're right. I, I think there is a distinct difference between men and women when it comes to making those decisions.

Andy Flattery: [00:25:31] Yeah, I think that's good. Yeah. So do you have any any other kind of rules of thumb that you follow from a financial planning perspective? So for example, like when setting up like an emergency fund or setting up short-term savings, is there anything

missed?

Michael Acosta: [00:25:45] For me, in all honesty, it's about prioritization and. And drawing a line for the purpose of the funds. So, you know, if I'm putting money aside and my client tells me that they want to have a sound emergency fund or life events [00:26:00] fund. Then we're not worried about yield. We're not worried about return on investment because that's the reward we're giving up for that security.

And so, you know, it's, it's a matter of setting the order of process or the stepping stones. And a lot of it has to do with how much discretionary cash flows left over whether we can multitask or not. And what I mean by multitasking is that if I have a client that comes to me were very. Minimal liquidity in their emergency fund.

Then most of the discretionary cashflow is going to be allocated towards building that up to where at a minimum there's about three to six months worth of living expenses set aside if there's additional discretionary cashflow to go along with it, then we can start to fund that midterm bucket at the same time, just with a lower percentage of the overall discretionary cashflow.

And then once we hit that three to six month benchmark, then we reassess that ratio of, you know, Cashflow is going towards pure savings versus midterm. And we start to shift it to be more towards midterm that they've, that they've, mentioned with me. So for me, it's a matter of removing [00:27:00] emotion, understanding what the purpose of these funds are and not getting sucked into the chasing return.

Because I think that's just a bad strategy in general. There's too much, too much set on hope and hope, non hopes, not an investment strategy.

Andy Flattery: [00:27:14] excellent. Well, I think that was, that was well, well done, Michael. By the time we release this, we'll have your new bio up on Catholic financial planners.com. So the listeners can check that out. But other than that, is there anything that people can do to learn more about you?

Michael Acosta: [00:27:30] Yeah, no, absolutely. Obviously once, once I'm up in, in, in, live on Catholic financial planner and can check me out there under the financial planners that are listed. Also free to follow and shoot me some likes on Twitter at plan with a as well as just my Facebook business plain with a cost as well.

I try to be fairly active on a daily basis if not weekly basis. So I'm constantly putting out content and shout outs.

Andy Flattery: [00:27:54] Yeah, cool, man. I know we're we're Twitter buddies, so I'm enjoying to see seeing what you're posting up on there. And [00:28:00] this has been great.

Thanks for, thanks for coming on.