As a follow-up from my post on “Short, Medium, Long Term investments”, I’m dedicating a few posts to diving more into what these types of investments are and why a young professional should utilize them. In the last post, I reviewed short-term investments and talked about how money you plan to use in the next 0-2 years shouldn’t really be ‘invested’ and instead should be kept safely in a savings account. Today’s post will dive into money that you plan to use before you retire (i.e. around 65 years old) but not necessarily use in the next 0-2 years.

Why are they medium-term investments?

Let me introduce you to the hierarchy of saving/investing that I personally adhere to. I always say that I want to allocate and put my money in the places that it’ll work hardest for me. Generally speaking, with time and somewhat normal market trends, an index fund should return on average 6-8% on an annual basis, vs. maybe 1-2% in a savings account. So, if I can afford to take the risk (i.e. lose a little now, earn it back over time), I would prefer to put my money to work in the stock market via an index fund (which is a fund that invests in the general market and is deemed less risky compared to other funds). Since I don’t plan to need the money in the next 2 years, I feel ok about investing it. Some months it’ll go down, some months it’ll go up, but overall I should expect to see a positive upward trend that goes higher than just a savings account.

There are a couple of basics you need to cover with your finances before you jump into investing. You should first make sure you have an emergency fund that covers 3-6 months of expenses. Additionally, you’ll may want to keep a general savings account handy with some money in there to cover any monthly shortfalls. You’ll also have your short-term investments taken care of – i.e. saving for a car, house or grad school. Once you’ve gotten all of that squared away (and you’re contributing to retirement, more on that next post), your additional money should go towards the medium-term term investment category. This is money you don’t need in the near future, but would like to have one day, and ideally like to have it grow a bit while you wait.

How should I invest in them?

Although you could put your medium-term investments into a savings account online ones like CapitalOne pay much better than traditional banks) or a Certificate of Deposit, you’ll really be hard pressed to earn much more than a 3% return. 3% isn’t bad (at least it’s growing), but you could be doing much more with your money. The stock market on average returns about 6-8% each year (with some better years, some worse years), so you should put your money into the stock market. If you’re more risk averse, feel free to keep some in a savings account, but push yourself a bit and do put some in the stock market.

To actually put your money in the stock market, you’ll need a brokerage account. If you don’t have one, it’s easy and takes 15-30 minutes to open one online. Many banks will have brokerage accounts too (i.e. Bank of America allows me to all-in-one have checking, savings and investing), or go through Vanguard, eTrade or TDAmertirade. All are solid, reputable options that keep their fees low. If I had to list a favorite I’d say Vanguard, as they’re really committed to keeping costs low. You’ll need basic demographic info (along with your SSN for tax purposes) and that’s it! You’ll start moving your medium-term money into the account each month. For me, a portion of my monthly budget is devoted to medium-term investments and I try to save/invest each month.

Once you’ve got money in the account, you’ll purchase stock shares or mutual fund shares. My strong recommendation is to invest in an index fund. An index fund is a low cost, solid return, no brainer investment fund. It attempts to buy shares in most of the major companies on the stock market. Instead of speculating with picking winners that may turn out to be losers, an index fund is great because it traditionally has offered better returns than many other mutual funds or event stocks for that matter. $VTI or $SWTSX are solid low cost index fund options. As you move money, you can purchase more shares in your index fund each month, or every other month depending on how much money you’re moving into the account.

What are some examples of them?

Examples of medium-term investments really can vary. Perhaps you know you want to buy a house but know that it’ll be 5 years before you do so. Maybe one day you and your spouse want to have children and want to start stocking away money for your future child. It could be a large remodel or the idea of going back to grad school. Medium-term investments are great because having them means you’ve got your finances in order and are able to do more with your money instead of just having them in a savings account. It’s nice seeing your money grow on average 6-8% each year instead of the 1% a savings account might pay. Over time you should see an upward trend and you’ll know that your money is working harder for you!