I always knew that I wanted to buy a house.

So right after graduating, I began relentlessly jamming money into my savings account until it ballooned to my target. After hitting my goal, I kept piling money into the bloated account. Shortly after, I realized what a dumb decision that was to continually put money into the bank after hitting my goal.

For perspective, the period from 2013-2018 was smack dab in the middle of the longest stock market bull run in history. Bank accounts were returning near 0% (like today) and inflation was near 1% (also like today). Therefore, every dollar that was sitting in my account was dying a slow death. I don't know when the lightbulb went off in my head but it suddenly hit me that every day I wasn't invested in stocks (or bonds), the more money I was sacrificing to the gods of inflation. And as someone in finance, losing money in such a fashion should be grounds for permanent expulsion from the industry.

Right away, I moved my "extra" money into the stock market (via index funds, of course). But I kept going: I moved a healthy portion of my house savings into index funds as well. The rest sat in my bank account. In line with my risk tolerance, I positioned my savings such that the only way I wouldn't be able to afford my house was if stocks faced very heavy losses. And if that happened, so be it. I'd delay the house search and save more money.

After this experience, three certifications later, and working with non-profits, I became convinced that medium-to-long term savings goals should generally never be based on a strategy of setting 100% of your money aside in a bank account. In fact, my belief is that your savings should generally always be invested in a blend of stocks and/or bonds assuming your goals are at least 2-3 years out. For shorter goals, 100% is advisable. Allow me to address this in more detail.

Stocks always go up

There are no guarantees in the world of investing but the closest thing to a guarantee is the fact that the stock market will go up in the long-term. Of course this comes with the caveat that the past is no guarantee of the future. However, if the market didn't always go up over the long term, the world economy would stop growing, and civilization as we know it would be on the verge of collapse. Therefore, for medium to longer term goals, stocks are a good choice. Just be aware of the volatility. You can face pretty heavy losses, which can definitively shrink the possibility of achieving your goals.

Bonds are a very resilient

Vanguard's Total Bond Market Index Fund has only lost money in 2 of the last 15 years on a total return basis. Not to mention that during times of market stress (e.g. COVID), bonds hold up remarkably well. When the market tanked 33% in March 2020, bonds were up. They are also not as volatile. Therefore, bonds are great choice for short to medium term goals and risk-averse individuals.

Yes, you might lose money

That's how investing works. And that's why you have to be smart about it. The shorter the goal, the more should be in cash. The longer the goal, the more should be in stocks. It's a sliding scale.

The importance of the goal matters, too

If you're trying to buy a business in 5 years and you need to have $50k by that time, then putting 100% of the savings into cash is probably the way to go. (Not sure if goals are ever this restrictive or mandatory, but I feel the need to explain the concept somehow.) On the other hand, if you're trying to buy a Tesla in 5 years, you can afford to be a little fast and loose with your savings; a heavier allocation to stocks is more acceptable. I mean, you don't need a Tesla, and if you don't have it in 5 years, you'll be okay. But who am I to judge? That's for you to decide.

Yes, you might have to pay taxes

So what? That means you made money. It's better than having your money sitting in a bottomless chasm, slowly rotting away.

Be smart about selling when it comes time to pay for your goal

In general, I don't time the market. I don't believe it in. Therefore, when it's time to sell your investments to pay for your Tesla, you have two options: sell everything when the money is due or sell small amounts over time until you have the money you need. - The former option deserves no explanation; when it's time to sell, you sell whether the market is up, down, or anywhere in between. This is the simple, no thinking approach. - The latter option is essentially the reverse of dollar cost averaging. By selling at different times, you're mitigating the risk that you'll sell everything when the market is down (remember, you hope to sell when the market is up). This is a better approach for risk-averse individuals and people who can't keep their eyes off of Robinhood.

Ideally, you shift your allocation over time

Target Retirement Funds, or Target Date Funds, are funds that are initially heavily invested in stocks. As you get closer to retirement, it automatically shifts towards a heavier allocation in bonds. Why? Because when you need the money for retirement, you don't want stocks to collapse and ruin your chance of drinking a margarita on the beach. In short, the fund is adjusting risk, going from more risk early on to less risk towards the end. Ideally, your savings should work the same way. So as you get closer to your goal, you shift from stocks to bonds, from bonds to cash, or from stocks to cash. It's hard to be very prescriptive about the timing of when to do this. Just know the basic concept and be aware.