ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Tuesday, June 18, 1996 TAG: 9606180102
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF/STAFF WRITER
HERE is the story about the long and short of saving.
Financial advisers talk of saving or investing for the "short term" or the "long term." What exactly do they mean when they speak of those time periods? How short is "short term," and how long is "long term?"
When you invest money it it important to know when you will need it, said David Cissel, a certified financial planner with Financial Solutions in Roanoke.
If your goals are short-term - generally less than five years - then your main concern must be safety, Cissel said.
Examples of short-term goals, he said, are saving for the downpayment on a car or house or perhaps a dream vacation.
For these goals, you usually already know how much you will need and have at least an idea of approximately when you will need it.
You don't want to buy investments that fluctuate in value, such as stocks or long-term bonds, in accounts set up for these goals, Cissel said. He recommended money market or bank savings accounts as good places to put your money if you need it within a year or so.
Funds you have set aside for emergencies should be considered in this short-term category, Cissel said. Because you don't know when you will need it, you don't want to take any investment risks with this money.
Financial planners usually recommend keeping enough money in an emergency fund for three to six months of living expenses after a job loss or disability or some event that's impossible to anticipate. You must keep it in investments that are liquid, meaning that you can get into the funds without a delay if you face an emergency such as a large car repair bill, a legal bill.
If you are saving for a goal that is one to five years out, you may fall into what some planners call an intermediate category. Others still call it short-term.
If you have that slightly longer horizon, Cissel advised buying U.S. Savings bonds or U.S. Treasury notes or bonds that mature close to when the money is likely to be due. These are still extremely safe investments.
Cissel said U.S. Savings Bonds can be purchased through a bank in denominations as small as $25. U.S. government notes or bonds can be purchased through a broker or directly from the Federal Reserve Bank in denominations of $1,000. They pay a stated amount of interest every six months.
Another excellent way to save for the short term is through zero coupon bonds, also known as STRIPs, Cissel said. These are bonds that mature at a stated value which you purchase at a discount.
One advantage of zero coupon bonds is that you know exactly how much you will receive when they mature. And you do not have to worry about reinvesting the interest because it is paid only at maturity.
One disadvantage, on the other hand, is that the Internal Revenue Service will tax you every year on the income even though you haven't yet received any interest.
For short-term goals, Cissel said, you should avoid bond mutual funds. Because the price of these funds fluctuates, you may find your investment has declined in value just when you need it.
To make your savings task easier, you might keep short-term money in separate accounts: a car fund, a down-payment fund and an emergency fund. But determine first whether you can get a more favorable rate of interest by combining your short-term funds into a single account.
The Institute of Certified Financial Planners said long-term goals are typically those more than three to five years away. Such goals might include retirement or starting your own business.
Even if you are approaching the age of 65, retirement is a long-term goal. With increasing life expectancies, you need to plan for a retirement of 20 to 25 years.
Sometimes whether the goal is long or short depends on your situation. If you are saving in a college fund for your 6-year-old child, you have a long-term goal. If your child starts college next year, paying his or her tuition is a short-term proposition.
These goals are long-term for two reasons:
The pool of money you need to achieve the goals is large. You'll need time to build it.
The types of investments you'll need to make to reach these goals typically are riskier over the short term. But historically, they have had better returns over the long term.
For longer term goals over five years, Cissel said, you probably want to include some stocks, either individual stocks or stock mutual funds. Even though the value is uncertain in the short run, he said, they have beaten other investments historically.
Stocks have averaged more than 10 percent in annual returns over the last 60 years, far better than cash equivalents such as Treasury bills, which have averaged 3.7 percent.
But in any given year - or even several years in a row - stocks might not do well. You wouldn't want to invest in stocks to buy a new car in two years, but they can be an excellent means of building toward a retirement fund.
Cissel said that larger stocks are generally more stable than small stocks. Since 1931, Cissel said, there have been only three five-year periods when large-company stocks have not made money.
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