According to the 2008 American Psychological Association’s Stress in America survey, money is often on the minds of most Americans. In fact, the results revealed that money and the state of the economy are two of the top sources of stress for 80 percent of Americans. And symptomatically, one third of Americans reported losing sleep over the economy and personal finance concerns, according to a recent poll by the National Sleep Foundation.
Know that we have a problem and understanding what to do about it are miles apart… and even further removed can be actually changing our behavior.
Some believe that we should start making better financial citizens before they enter the workforce. Sharon Lechter, a member of the President’s Advisory Council on Financial Literacy is on a mission to see that every student receives some form of financial education. Her goal seems closer with the recent introduction of a Congressional bill that would require every college and university receiving federal funds to provide a four-hour course on financial literacy.
This strategy and may provide much needed money sanity for the next generation and prevent future financial meltdowns, but what about those of us who don’t have time to go back to college? Let’s get real simple…
In last week’s entry we talked about four buckets of money
- Essential, Now (less that 5 years)
- Non Essential, Now
- Essential Future (more than 5 years)
- Non-Essential Future
This week’s post addresses why did I selected five years as the tipping point between now and later. It has to do with the trust level I have for where I park the money and how much chance is there to lose it versus the opportunity for growth.
For example, there is historical evidence that I can’t trust the stock market to park my money for less than a 5 year period. To illustrate, let’s take a quick look at the best and worst stock market periods over 1, 5, 10 and 20 year periods.
| Best | Worst | |
| 1 Year | +61% | -39% |
| 5 Years | +30% | -4% |
| 10 Years | +18.5% | -1% |
| 20 Years | +18% | +5.5% |
Although this data is historical and not necessarily a predictor of future market activity, there is a huge difference between the 1 and 5 year swings. While I’m not willing to take the possibility of a 39% loss for money I need in the near term, the risk of a 4% loss over a 5 year period seems more palatable.
So how does this help me? Concluding that exposure to the stock market will only be for money uses outside of the next five years, I can concentrate on more conservative vehicles for near term needs and wants… and be one of the poll respondents who actually can get a good night’s sleep.
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