Saving is a highly praised virtue by it is highly probable that you are selling yourself short by ignoring investing. Famed author Robert G. Allen once asked if any knew of several millionaires who got their wealth by keeping their money in a savings account. Your guess is as good as mine.
Because having to continually rummage through old jackets and the back of your sofa for some spare change at the end of each month is not fun, most people learn the virtues of savings fast. A lucky few did pay attention to their parents’ warnings on the dangers of blowing every single coin that they earn and have not had to live from paycheck to paycheck.
To save money for a rainy day is inherently human, and whoever fails at this obligation, often learns the unpleasant and hard way when the unexpected becomes a reality. Squirreling away funds can not only move you on up to larger homes and a better car but will allow you to enjoy the good things in life minus the stress, such as holidays or giving.
The cost of inflation on savings
The tricky issue about money, however, is that money mutates and what you have stowed away today will be worthless in a year. So long as that cash sitting pretty, it will meet dear inflation. And while your wage may not increase by much, your cost of living will keep skyrocketing and the value of your savings depreciating.
Take this good example. A gallon of milk selling at $3.50 will with the cost of inflation cost between $3.75 and $4 in a few years. So, if you love dairy and are stowing up enough $3s to delight your heart at retirement, it is highly likely that you will not have enough to purchase it.
The $3 will have less purchasing power than it has now. If however, you decide to save that $3 into a good savings scheme, you could earn some reasonable interest rate on it ensuring that your daily dairy dream is intact years down the lane. This will help you overcome the limitation of inflation.
Savings vs. investing
Savings accounts earn interest on saved funds protecting the nest egg you have stowed away from some measure of inflation. These savings vehicles are subject to APY that hits lows of 1%. However once the low APY is sprinkled with the fantastic effects of compound interest, it garnishes your savings further, over the years.
Investing is another cuppa tea altogether. If you come home after a hard day’s work and turn Bloomberg on, you have most probably been admiring the money-making potential of the money markets but are most likely intimidated by it. You are not alone. Most savers on the fringes of the world of investment are plagued by the stigma that most investments instruments have acquired, portraying them as gambling. You could make it big or lose all you think. It because of such misconceptions that a Gallup poll shows that it is only 55% of all Americans that invest their hard earned cash in stocks.
However, a person like who is well on their way to wealth growth thanks to practiced savings, can up the ante by investing. You can spend your money in real estate, bonds, mutual funds or stocks. These are long term investments goals since they work better as growth investments. You can also get involved in income investments that generate cash in the short term. However, investing whether short or long term can give you more bang for your back, and get you on the road to financial independence faster.
Think about it, a $2,000 sitting in an account earning a 3% as yearly interest will amount to $3,612 in two decades. Send in the tax man, and you will have much less. However, if this $2,000 is placed in the mutual fund stocks and given a round figure 10% annual interest, this same amount will be a reasonable $13,455 in the same two-decade period. With good investing education, set goals and foreknowledge of your risk tolerance, anyone can move from savings to investing.
Invest your savings for short-term goals
Try a money market account or online savings
Short term investments just like short term savings can be classified as funds that could be spent in a minimum of half a year and a maximum of three years. Such savings and investments should be available for use in a crisis, vacations, holiday purchases or bi-annual and annual payments.
You can also apportion these funds for those unexpected procedures and emergencies such as medical, replacements and repairs. These funds can be sent to a checking account or withdrawn quickly.
A money market account offers quick liquidity and is FDIC insured. Its interest rate is not high and may at times be at a 0.09% low, but in an online account, you can earn up to 2% which is higher than what savings account in a bank will afford you.
Invest your savings for intermediate-term goals
Try bank certificates of deposit
To invest your funds for an intermediate term means that your funds will be unavailable for use for a period of 3 years and up to 10 years. This route will give you better interest than what you will find with online money savings and the money markets. You can actually enjoy between 2.6% and 3.3% interest on saved invested funds.
Remember though that this cash is illiquid and there are minimum deposits accorded the bank certificates of deposit. The longer your CDs term, the higher the interest of your investment will be. If you are forced by circumstances to withdraw your funds earlier, you could suffer the penalty of some month’s interest.
Short term bonds
These also have better rates of between 2.5% and 3.2% but will also have minimums attached. They are made to the government or a business, which in return gives you interest as profit on the loan. Government bonds are most secure, and the short-term bonds are less affected by fluctuations in interest rates.
Peer to peer loans
This works if you have saved funds and have friends who look to you as the circle’s piggy bank. You do not have to save their skins for free anymore. You can charge them interest rates of up to 3 to 8%! You can also lend beyond your friends by joining Peer to Peer sites such as Lending Club or Prosper. Since borrowers on these platforms have an assigned creditworthiness score, you will be in control of the risk you are willing to incur. In Prosper for instance, the most highly rated loanees will give back 3.7% in returns while in Lending Club they will earn you 4.84%. If you disburse your just right loans in small chunks, you could make more.
Invest your savings for long term goals
Some of the most common long-term goals include retirement, homes and their extensive repairs or a car. You can slot in the significant levels of medical expenses and job loss savings. Most savers will only do the good old IRAs and 401k, but you can also try;
Equity index funds
This investment channel will offer high-interest rates of up to 10%, and you should be prepared to have the funds away for at least 10 years. You can, for example, purchase the S&P 500 which are low-cost buys and will not incur the expenses of a managed fund.
These just like 529 plans, these are investment vehicles that will manage your savings and invest them according to your preferences. They will handle all the subsequent taxations and remunerations, but you will be required to part with some minute payments for their trouble.
There are many ways you can turn your short- and long-term savings into money-making machines, but you need to get informed about their risks and benefits. The few vehicles mentioned here will in the meantime take your savings goals from good to great.