Keep 5 Years of Net Cash Needs Out of the Market
Because we never know what the market will do in the short-term, we should not have any money invested that we plan to spend in the next 5 years. This means if we consider all future income and future expenses and we find that in some years we’ll need to pull funds from savings to buy the things we want, then we need that cash on the sidelines away from risk until we spend it.
For example, let’s say you are saving for a down payment, and you have this cash piling up. You might be tempted to invest it until it’s needed for your home purchase. Don’t do that.
The last thing you want is for you to be ready to buy your home and have the markets crash leaving you with less than you need for your down payment. On top of that, in the scenario where the markets crash, you might even see home prices drop giving you a double whammy of regret!
The same is true for any big expense like paying for college or remodeling your home.
If you’re planning on spending more than your income in any given year of the next 5, keep it safe on the sidelines. The job of those dollars is simply to be there when you plan on using them. It is NOT to grow.