Lesson 3 of 10
Goals and time horizon
A goal needs an amount, a date, and a way to handle uncertainty.
The idea
Time horizon is the period before money will be needed for a goal. The ability to tolerate changes in value depends partly on that horizon and on whether the deadline or amount can move.
Separate willingness to take risk from the financial ability to absorb a loss. A person may feel comfortable with uncertainty while still needing a fixed amount for an imminent bill. This lesson defines the tradeoff; it does not choose investments for you.
Worked example
Illustration: Goal A is a $2,400 payment due in six months. Goal B is a flexible project planned several years away. Both involve saving, but Goal A has a tighter deadline and less room to recover from a fall in value. With no starting balance or interest, Goal A requires $400 per month.
| Question | Goal A | Goal B |
|---|---|---|
| Amount | $2,400 | Still being estimated |
| Deadline | 6 months | Several years |
| Flexibility | Low | Higher |
| Key uncertainty | Cash available on the date | Final cost and timing |
A common mistake
Using the same assumptions for every goal because all the money is in one account.
Try it yourself
A $3,600 goal is due in nine months. You have $900 set aside. Ignoring interest, how much remains and what equal monthly amount closes the gap?
Show the worked answer
$2,700 remains. Nine equal monthly amounts of $300 close the gap.