The key to investing or saving? Knowing and utilizing your time horizon.

First appeared in USA Today and The Indianapolis Star


I graduated from college in May 2016 and have been working at my first job for about six months. I make a good salary for a single 23-year-old and put a fair amount of that away in savings each month. Typically, I put one full paycheck in my savings account and use the other paycheck for bills/food/entertainment. I’ve played around with the thought of going to graduate school after I reach the two-year point with my current company, but I have yet to fully decide what I want to do in the not-so-distant future. Thus, the large savings comes in to play — it’s essentially my backup plan.

What is the best way for me to handle that money? Should I keep it in a savings account until I get further along as I’ve been doing? Should I put it in the market? Should I purchase bonds or a CD? I’m unsure. The money will likely sit in my bank account and I will continue to add to it each month, but I don’t plan on using any of it within the next year-and-a-half unless unforeseen circumstances arise.

— Sam

Sometimes it pays to be boring, and sometimes it doesn’t.

In your case, Sam, your diligent conservative nature may help you pay for grad school without taking on a ton of student loan debt, but your diligent conservative nature should also prevent you from attempting to grow your money over the next 18 months. Your time horizon is way too short to try anything cute. Preparing to spend money two years from now couldn’t be any different than saving money for the distant future, and that’s why you must remain boring.

Time horizon is one of the most important concepts in investing. When dealt with properly, you look like a genius, as perceived threats float past your account without incident. When handled poorly, you either won’t have the money you once had when you need it most, or you will have much less money than you could have had, had you simply understood the concept of time horizon. At the most basic level, time horizon describes the period of time until you need to liquidate an investment.

Sam, if you plan on using your savings to defray the cost of graduate school in 18 months, then your time horizon is 18 months. This matters because if you choose to invest your money in a market (stock, bond, or other), 18 months generally isn’t long enough to obtain your desired result of both modest growth and stability. Could you generate market returns in 18 months? Sure. Is it worth the risk? Not in my opinion.

This is the essence of saving versus investing. Saving is preserving money for a goal, while avoiding all perceivable risks. Investing is taking on risk to grow your money over a period of time. Time horizon determines whether or not you should be focused on saving or investing.

Let’s change your goal for a moment. What if your goal was to pay for a hypothetical child’s education 18 years from now, not 18 months from now? You would almost certainly invest the college funds to grow them over this long period of time. Alas, we’re not talking about years, we’re talking about months.

My rule of thumb is if your time horizon is two years or less, save the money, don’t invest it.

Depending on where you live, you may be able to utilize a 529 college savings plan and take advantage of the tax benefits. Additionally, some plans actually have CD (certificate of deposit) options. However, if grad school isn’t a certainty, I’d be hesitant to use a 529 plan because of the penalty associated with withdrawing funds for nonqualified expenses.

If I were you (ah, to be 23 again), I’d either keep the money in the savings account or find a 12-month CD to squeak-out a bit more yield. Keep up the great work. Your boringness will pay great dividends — not those kind of dividends.

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