Presented by : Bo Thibodeaux
As summer approaches, you are probably thinking of how to save for your next family vacation or other big purchase. Whether you want to take the grandkids to Disney World, cruise along the Amalfi Coast, or take a road trip across the country, knowing how to save for these kinds of goals is key. A financial advisor can walk you through the difference between saving for short and long-term goals, articulate what good debt can be, and explain how these factors will dictate how you save for your next summer vacation or other goal.
Saving for Short and Long-Term Goals
Before you consider how you should save for your goals, it’s important to make a clear distinction between short and long-term objectives. Short-term goals might include saving up for your next vacation, funding a child or grandchild’s wedding, or buying that new car. These kinds of goals will require a different type of plan than long-term goals like retirement planning, college planning, and setting up trusts and estates.
Most financial advisors will advise you not to sacrifice long-term growth for short-term goals. This means that you might not want to pull money out of your 401(k) or other retirement account to fund a smaller purchase. This is because your retirement portfolios are setup to grow conservatively for a longer period of time and sacrificing this growth can be detrimental in the future.
But if you aren’t funding your goals with capital pulled from investment accounts, how should you plan to pay for those fun expenses? In answering that, let’s look at the difference between good debt and bad debt and how debt can actually help fuel your financial growth.
Good Debt Versus Bad Debt
When you hear the word debt, your mind might jump to shady lenders, exorbitant interest rates, and maxed out credit cards. While these are some characteristics of debt, there is actually such a thing as good debt.
Most financial professionals consider “bad” debt anything that has too high of interest rates or debt that is used to pay off living expenses. Bad debt occurs when you charge credit cards more than you can pay off and end up incurring these high interest rates.
In comparison, “good” debt is taking out a low-interest loan for large purchases like a home, a car, or a college education. Most people don’t have enough cash to front these purchases without some sort of financing. And even if you do, paying all cash isn’t always preferred. Good credit can help you increase your credit score, build legitimacy, and free up cash flow for everyday living expenses.
Pop quiz on good and bad debt: you’re considering buying a new car that costs $20,000. You have an investment portfolio with $50,000 in it, which you can liquidate and pay cash for the car, and you qualify for a car loan with a 2% interest rate. Which option should you pursue, liquidating your assets or taking out the loan?
The correct answer will depend on a variety of factors, but many financial professionals would advocate for the loan. Because it is such a low interest rate, it’s likely not worth dipping into savings for such an immediate need.
When considering that next family vacay and as wedding season closes in on us, it’s important to know how saving for short-term and long-term goals differs and how credit can actually leverage your financials. Bo Thibodeaux at Cetera Investment Services is always available to chat about these savings goals (as long as you share pictures after the big trip!).
Bo Thibodeaux is a Financial Advisor offering securities and insurance products through Cetera Investment Services LLC, member FINRA/SIPC. Advisory Services are offered through Cetera Investment Advisers LLC. Cetera is not affiliated with the financial institution where investment services are offered. Investments are: * Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by any federal government agency. 135 West Colorado, LaGrange, TX 78945 (979)968-4500