With Short-Term Goals, Go For a Bird in the Hand

A friend of mine recently sold his house. It will be a few years before he’ll buy another one. Because the house was worth a lot more than what he and his wife owed the bank on their mortgage, they are now sitting on a pile of money and wondering what to do with it.

As we talked, the following became crystal clear:

■ They will buy another house in three to five years.

■ They don’t know exactly where it will be.

■ This money has to be there when it comes time to buy.

I could make a pretty good case that this money isn’t money at all; it’s a deeply held set of feelings. To my friend and his wife, this money equals shelter. It has to be there when they need it.

So when he asked me how they should invest this money, my advice was easy. I told him that he can take exactly zero risk with it, which means putting the money in something like certificates of deposit from a few different banks.

He understood my reasoning on a theoretical level. But when I told my friend he was likely to earn just about nothing on that money, things got interesting.

We work so hard to earn money. It almost kills us to think of our money not working for us. It feels morally wrong to let money just sit there doing nothing, like we’re unwise stewards. This is exactly how my friend felt.

But sometime, we need to let go of our focus on returns and shift our attention to safety. If we’ve mentally assigned money to goals just a few short years away, knowing that money will be there is more important than finding an extra percentage point.

Still, I understand the temptation to invest in the markets. What if stocks are poised to take off? What if we just heard some guru on a financial pornography network yelling, “We should all be buying the latest I.P.O!” What if our neighbor tells us that emerging markets will double our return?

To which I only have one reply: What if they’re wrong?

In a situation like this one, it’s helpful to recall and repeat Mark Twain’s advice to be more concerned with the return of our money than the return on our money. For things that are really important and less than five years away, like buying a house or taking a big trip, the return doesn’t matter. All we care about is making sure the money is there when the time comes.

So I’m over the idea that a big pile of money has to generate a big return. We could invest that money, but we’d also have to accept that three years from now, all the money might not be there. Any investment could come back later, but maybe not in time for the big, emotional goal we set. I’m betting at that moment, we’d feel even worse about less money or no money than no gain.

This commentary originally appeared May 26 on NYTimes.com 

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Carl Richards, CFP®

Carl Richards is the creator of the weekly Sketch Guy column in The New York Times and is a columnist for Morningstar Advisor. Carl has also been featured in The Wall Street Journal, Financial Planning, Marketplace Money, The Leonard Lopate Show, Oprah.com and Forbes.com. His simple but meaningful sketches served as the foundation for his first book, "The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money."

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