Investing with a medium-term timeline

Investing with a medium term timeline poses its specific challenges. An investment plan looks into the future and include things like a new car or home purchase in a few years, education expenses for children, and retirement, just to name a few. All of these goals require money in different time frames, and the money should be invested accordingly.

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The guidance of the Bogleheads® investing start-up kit and the Bogleheads® investment philosophy certainly applies for investing with a medium-term timeline. Special care has to be taken to correctly understand the need, willingness and ability to take risk on medium term and to take that into account in the AA for the medium-term investing.

One could distinguish the following kind of goals with a medium term timeline: An emergency fund is a cash reserve required to meet unanticipated needs for cash, such as medical bills or job loss. The goal of the emergency fund is to provide a cushion of liquidity in the event of unexpected expenses or of a loss of regular income due to unemployment.
 * Saving for regular anticipated purchases: I.e. expenses for household appliances, new car, marriage/children that cannot easily be funded from the cash flow.
 * Medium-Term investing for specific projects that are some years away: like a down payment for a house or setting up a small business
 * Saving for future education is very specific; please refer to the pages in the on this wiki.

Investment authorities commonly advise investors with goals coming due within five years to restrict investments to short term instruments such as bank CDs, money market funds, and short term treasury securities that all mature by the time the funds are needed.

An investor would like to invest money for goals with a medium-term timeline in a vehicle with better return than cash to give this money a chance to grow. Longer term goals can include asset classes that fluctuate in price.

Elements to take into account when determining how to invest for medium term
The characteristic of the project for which one is saving poses constraints on the investment.

What flexibility is needed? How firm is the timetable of the project? Is it possible that the project needs to be initiated earlier than initially planned? Can the project be delayed if the investment does not have the necessary value at the target date, either due to lower return or loss of value? Can the project be put off until the investment recovers?

What is the savings rate, could one make up the shortfall before the target date if the value of the investment does not correspond to expectations?

One’s general approach to investing is also important. Is capital preservation mandatory? Or can the capital be put at risk to strive for higher return?

Particular tax constraints can also limit the choices for the investment.

Saving/Investing Options
Once can distinguish some classes of investments with respect to the timeline. It is advised to convert as the due date nears; from Equity to bonds to safe fixed income instruments and finallu Cash. One can dollar cost average gradually

Cash like: Very liquid and super easy to access, guarantee on the capital, very low return. Examples: Checking account, money market fund, (High Yield) (insured) savings account, ....

Reward checking account[RCA] : if one is willing to put in the effort to set-up and maintain to get the higher APR.

Fixed income instruments Different Attention points:
 * CD and similar: Early Withdrawal Penalty if not kept to term. Buy multiple sizes to avoid breaking the full CD and pay EWP on them
 * US savings bonds: 1-year lockout, annual purchase limit.
 * Short term United States Treasury security:
 * Tax-Exempt Municipal bonds Funds:
 * I savings bonds:
 * Pls control the duration of these instruments to be in line with the due dates on the projects.
 * For the bonds, ensure the quality is very high to avoid loss of principal.

Funds and ETFs Longer timelines can be satisfied with safe bond funds/ETFs, or even safe equity funds/ETFs.

The options mentioned in the multi-tiered emegency fund and the comparison between emergency fund and line of credit can also be useful for medium term investing.

Taxable / tax advantaged accounts
Saving for short and medium term goals should be done in a taxable account (checking, savings, CDs,...). because taxable accounts do not have an annual contribution limits; they are refillable: take some money, put some money back, not a problem.

It is not recommended to save for known short or medium term needs/goals in a tax-advantaged account. Because such TA accounts have annual contribution limits. While it is possible to witdrawn money under special considerations. , they are not refillable, you can't put the money back after an early withdrawal. Your retirement growth potential is permanently harmed.

On the other hand, it might be advantageous and possible to utilise non-used tax-advantaged space with extra contribution that have a medium-term timeline. This takes advantage of valuable Roth IRA contribution space that would be lost forever if you do not contribute. Compound interest requires time and money to work. Tax-advantaged space is better than taxable space. More tax-advantaged space is better than less, so use all you can every year. The advantageous is more likely if the mid-term goal is not certain. Please read the description in the wiki page on Emergency_fund.

If you have a sizable taxable account, it is possible to place a cash needs requirement, such as a home down payment, in a tax-advantaged account and improve the overall tax efficiency of an investment portfolio. See Placing_cash_needs_in_a_tax-advantaged_account