In this blog, we have talked about creating a budget and paying off debt, but we really haven’t delved too deep into the subject of where to put your savings. You may be wondering, “Don’t you just put it in a savings account and that’s it?” Not quite. To get the most out of your savings, you’ll need to do a lot more than just put it in an account.
Build your Savings to $2,000
The first step is to get your savings up to $2,000. I have mentioned this quite a bit in my post on 6 Simple Steps to Creating a Budget and 3 Simple Steps to Paying off Debt. However, in case you haven’t read those, the $2,000 dollars is your emergency fund. Think of this as your financial building block. This base of $2,000 allows you to withstand the tribulations that come up in life without having to go into debt. Next, you will focus on paying off your debt, which has already been covered here.
Start Saving a Six Month Emergency Fund
Once you have paid off everything but your mortgage debt, you will be ready for this step. We need to start saving up your six month emergency fund. Some personal finance coaches will state that you shouldn’t have more than 1 – 2 months of saving and the rest should be invested. I disagree with this philosophy for two reasons:
Most people need to access emergency funds during recessions, which is when the markets are typically at their lowest. Invested funds are not as liquid, so you could experience a delay in getting the funds back. Instead, I am a firm believer that you should have six months of savings in a liquid and stable account. That means that you should have the money in a Savings Account, Money Market or Certificate of Deposit (CD).
Pros: Easy to access money Secure place to store your money Typically has a small minimum balance requirement Can only withdraw money six times per statement period
Cons: Lowest Interest Rate Not as easy to access as a Money Market
Money Market Accounts:
Pros: Easier to access than a savings account (via checks or a debit card)Secure place to store your money Often offers a higher interest rate than a savings account Can only withdraw money six times per statement period Cons: Usually require a higher minimum balance to open Typically tiered interest rate (needs higher balances to get the best rate)
Certificate of Deposit (CD):
Pros: Typically offer the highest interest rates Difficult to access, so you won’t be tempted to touch it Cons: Money is locked into terms: 6-month or 12-month terms are typical Penalty fees are incurred if you have to access the money early Require a higher minimum balance Insider’s Tip: At CD maturity (end of the term), you are typically automatically re-enrolled into another CD, often at a lower interest rate. Make sure you keep track of when it matures and choose the new CD term and rate you want.
For Savings and Money Market accounts, check to see if your bank or credit union offer any special benefits for having one of these accounts. Some will offer discounts or special offers that most people don’t even realize are available.
For CDs, consider splitting your balance into several different CDs so that if you do need to access your money, you only pull a small amount and the rest can remain earning interest. Also, consider using a CD Ladder Strategy, which we’ll eventually cover in more detail.
Saving Money by Investing
We have gotten to the final stage of saving options, which is investing. If you have followed the steps above, you will have developed the cushion that you need in order to start investing money. If you are wondering why you should invest your money instead of just saving it, look at the chart below.
Above I have laid out three scenarios. The same amount is invested in every scenario. We start with an initial investment of $20,000 dollars and invest $6,000 a year for thirty years. The scenarios show how much you would have at a 3% return – which would be a very generous savings rate and is above the current environment – 6%, and 12%. As you can see, it does not make sense to just save your money.
How to Invest your Savings
I know that there are probably some of you out there that say investing in the stock market is essentially gambling. If you are trying to day trade or buy stocks and then quickly sell them again, then I agree. That method does not work!
Instead, you need to prepare to have your money in the market for the long term, which is where you see your return. I would suggest most people open an account with a broker, like Vanguard or a Financial Adviser you trust. Have them purchase ETF’s which are funds that follow the market so they offer lower risk and lower management fees. I do want to add a note here that if you have a 401k, HSA or any other tax advantaged plan offered by work. You will want to invest your money in those accounts up to your companies match limit in order to maximize your money. I will be providing more information on those at a later date.
If you would like to do some experimental investing yourself, you can use Robinhood to try your hand at purchasing stocks you believe in. I would suggest that you only use small dollar amounts that you aren’t afraid to lose, as you are going to make mistakes or the market will fluctuate.
Also, don’t be afraid to look for investment opportunities outside of stocks. Maybe there is a local company you would like to invest in. Maybe you are interested in cryptocurrency. Since you have money to fall back on, you have the ability to take some calculated risks. My wife and I are always looking out for interesting opportunities, and you will be amazed at what comes along when you are keeping an eye out.
Just remember two things when investing your money.
Never invest money that you cannot afford to lose. Always do your research and understand what you don’t know. Do you have any comments or any tips and tricks for saving money? Let us know! We are always happy to hear from our readers!