Saving money is easier said than done. Once you decide to save, what should you do with the money you are no longer spending?
First, pay off debt. Lower your expenses to live below your means. Once your debt is paid off, continue depositing monthly payments into your own savings account.
Set goals. Even small amounts make a difference. As long as you are saving something, you are moving in the right direction. Don’t be fooled into thinking an amount is too small to make a difference. At the very least, it will solidify in your mind that you are a saver, actively working on a retirement plan.
What should you do with your savings?
The first part of your savings plan should be your emergency fund, invested directly in the bank. This way, you’ll have easy access to it if and when you should need it.
Then, consider placing funds in investment vehicles like:
Stocks – are shares of a company. In purchasing a stock, you buy an actual portion of the company and can participate in its long-term growth. Stock owners earn money from the long-term appreciation of the company (eventually selling shares at a higher price than what they paid for them), and by receiving periodic dividends (distribution of the company’s profit). Stocks are considered risky investments, since there is the real potential of significant loss of principal.
Bonds – are loans you make to a company or other entity. Bondholders earn money from the interest payments the company/government/municipality pays for the privilege of borrowing cash. Since bondholders generally know the interest payment schedule in advance, bonds are useful investments for folks who want to receive regular income from their investment account (as opposed to growth). While generally considered more conservative than stocks, depending on the company and type of bond, there is a chance of losing principal with bonds too.
Mutual funds – are baskets of different investments, as opposed to individual stocks or bonds, and are used to diversify an account and by spreading out exposure. There are many different types of mutual funds, each carrying its own risk level and pros and cons. Spend time researching the fund before you buy. Don’t just focus on the past performance of the investment. Rather, look at the management, the investment style, the asset allocation, the fees, the risks, and the volatility. Though many people pick funds themselves, others get counsel from licensed advisors. For long-term savings, mutual funds that invest in stocks often make more sense than buying individual stocks since the funds offer both instant diversification and professional management. Always read the marketing documents and prospectus before investing money.
Liquid investments – at the same time that you want to invest your savings in one or more of the different investment vehicles mentioned above, it is important to keep a portion of your investments liquid. Short-term CDs, money market funds, and cold cash are all considered liquid investments.
All the investments described here have risks; discuss them with your advisor before purchasing. Investment advisors frequently use several of these investment vehicles in combination in order to set up a well-balanced portfolio that maximizes returns and minimizes the potential for loss. Once you have made the decision to save, do it efficiently so that your money works its hardest for you.
This is an excerpt from The Retirement Planning Book. The complete e-book can be downloaded for FREE at www.profile-financial.com