Many of you know I talk about investing and the power of index funds all the time, but today’s post is about when NOT to invest. The power of investing comes from time. When you have a 10+ year horizon the impact of buying and holding index funds can be massive. But over a shorter period investing your savings can add a lot of volatility but generally won’t help you achieve your goal much faster.
In this example, even though index funds are returning a huge 10% compared to a savings account’s 2%, investing only will get you to your goal 3 months sooner on average. If the market tanks during that short time, it could set you back way further than three months. This isn’t a problem when investing for long term (10+ years) because the market will have plenty of time to recover. But if you’re trying to buy a house, you don’t want to wait another five years for that to happen.
I get this question all the time: “Where do I put my emergency fund and short term savings?” My answer: Just a regular old savings account. I personally use a Fidelity cash account that pays about 2%. But I don’t put a lot of energy or effort into trying to get a 1/10th of a percent higher interest because it really doesn’t move the needle in the bigger picture.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.