In today’s environment fraught with different kinds of financial insecurity, it is vital for all individuals, couples, and families to save and invest so as to ensure financial security and stability.
‘Savings’ refers to a safe product or place where you put your money with ready access to it whenever you want. It can include your savings or checking accounts in banks, gold, certificates of deposit (CDs), etc. Savings offer easy liquidity and security, but they offer very low interest rate. Saving money also means searching for discounts and deals and purchasing necessary quality products at the best available price.
Investments are products that offer a higher return on the money that is put in by you, but it comes with a greater risk of you losing your ‘principal’ money. Investments can consist of mutual funds, securities, equities, and other kinds of investments without federal insurance.
It is important to know that the longer you wait to start saving and investing, the more you will need to sacrifice to meet a specific savings and investment target. For example, a 40 year old may have to save nearly twice the amount that a 30 year old would in order to reach the same financial goal. It is however important to remember that it is never too late to begin saving and investing.
A budget can help you reach your savings targets. A budget is a plan that shows your current and possible future expenses, the total income earned, and the different avenues of expenditure. Making a budget can help you save for unexpected expenses, pay the bills on time, and create a fund for retirement.
People who want to pay for college, a house, or retirement, etc., have to not just save but also invest so as to make their money grow and allow the financial goals to become a reality. You may seek the help of a licensed finance professional to help in investment, or you may do it on your own.
It is important to get the fundamentals of different kinds of investments before investing. You should also find out the answers to the below listed questions:
- What will be the returns on the investment and in what form will you get such earnings in, i.e., as dividends, interest, or rent? Bonds typically offer a fixed sum earning, while the returns of most securities/equities tend to fluctuate as per market conditions. It is important to remember that investments which offered good returns in the past may not necessarily continue to provide handsome earnings in the future.
- Is the investment easily liquid? Verify the amount of time needed to sell and cash out the investment. Investments like IRAs or CDs have limitations on when you can sell and get back your money. Shares, bonds, stocks, and mutual funds can generally be sold whenever you want; however, there is no certainty that you will get back every cent of the principal invested.
- What kind of risk is associated with an investment? Nearly all investments do not come with a guarantee of assured earnings and/or return of money invested. In most cases, higher returns come with increased risk while lower earnings come with low risks. U.S. Treasury securities are backed by the federal government, but other investments do not have such federal protection.
- Does an investment come with tax benefits? There is no federal income tax and occasionally no State income tax on municipal bonds. There are no local or state taxes on US Savings Bonds. Tax-deferred specific goal-oriented investments like paying for retirement or college allow you to put off or even avoid income tax payments.
- What kind of diversification is available? It is possible to decrease the risk of investment by putting your savings into different investment products. Certain products offer better earnings in specific conditions as compared to other investments. For example, the prices of bonds tend to reduce when there is an increase in the interest rates. Thus, some sectors may suffer in certain situations while others may grow and prosper in the same situation.
Investments like buying real estate, mutual funds, stocks, bonds, or shares, etc. is one of the ways for making your money earn more money. Since investments involve risk, there is the chance that you may lose all the money invested. It is a good option to save by investing in long term goals like paying for college or retirement.
In case you have not already started saving and investing, but want to commence saving and investment for financial safety and security, then you need to sort out your financial priorities.
- Create a contingency/emergency fund for sudden, unexpected expenses. Having such a fund will offer you a safety net that can be used for emergencies instead of digging into your savings or investments to meet the emergency requirements.
- Eliminate all types of bad debt, especially those with high interest rates, fees, and charges. The amount you pay for bad debt can often be higher than the earnings on investments. Pay off all credit card dues with interest rates of 8 percent or more.
- Retirement may appear to be decades away for people in their late 20s or early 30s. But it is never too early to start saving for retirement. If you do not save a sufficient sum for retirement, then you may end up working after retirement as well to meet your expenses or you may depend on your children. Match the company with your contribution to 401(k) and then put as much money as possible into a Roth to get tax-exempt growth.
- After you have saved for the above necessities, you can begin saving every month for other important expenses like college education for your kids, or a car for your college-going kid, etc.
After take care of your financial priorities, you may strategize your investments to reach other financial goals. The most important aspect of investment is diversification of investment. The right asset allocation in the investment portfolio will help you get the best returns. People in their thirties can afford to take risks and hence should invest in high-yielding investment options like stocks, shares, etc. People in their fifties should be more conservative and allocate a bigger share of their investment pie to less risky bonds and debt funds. Also, involve your spouse in all investments and decision making processes.