You may build a solid financial foundation by saving or investing. Furthermore, each has its own quirks that determine when it’s most useful.
The biggest distinction is in the risk-reward profile. Earned interest on savings often produces a smaller return than other investment options, but there is essentially zero risk involved.
However, the potential rewards from investing are much higher, but so is the potential for loss.
It is estimated that the average yearly return on equities since the S&P 500 index began tracking in 1957 has been around 10%. You can see how it stacks up against the average return on a high-yield savings account, which is less than 2%.
Even if stock prices fluctuate more wildly (something you may have noticed this year), the potential for greater gains makes equities a powerful tool in your financial toolbox. However, knowing how and when to employ them is crucial.
In order to determine your personal risk/reward threshold, consider the following sixquestions.
It’s a basic question with a straightforward solution. All of your financial investments should be working to assist you reach your personal objectives. Long-term and immediate targets are included below.
And everyone has their own unique set of criteria. An individual saver may have their sights set on a down payment on a starter home, while a retiree investor may be looking to provide for a growing family.
Investment strategies are not one-size-fits-all due to the individuality of one’s aims. Thus, before developing an investment strategy, you should consider why you want to put money away.
2. When is the right time to invest?
First, check your debt. Instead of investing, pay off debt. Debt delays financial independence.
When you pay 24% interest on credit card debt, remember that it costs you more than you can earn elsewhere.
Even if you’re paying a cheaper debt, say 12% per year, there’s an immediate return. Please see Debt relief.
How do you handle curveballs? Or a googly? Jobless. Urgent care. Unusual travel to see an injured relative. House needs considerable restoration.
When the unexpected happens, utilise a credit card, personal loan, or borrow from family and friends. All loans must be repaid.
Without an Emergency Fund, you may go into debt or tap your investments, jeopardising your ambitions.
You may be obliged to sell investments at a terrible time, resulting in a loss and tax consequences.
3. Do you owe any debt to consumers?
If that’s the case, you shouldn’t feel too isolated. However, not all forms of debt have the same effect on a person’s financial situation. For example, having a mortgage will assist you in accumulating equity.
But carrying a balance of high-interest credit card debt will always be a burden for you. If you pay off the balance first, you can avoid paying hundreds or even thousands of dollars in interest, money that you can then put toward paying off other debt or investing in other areas of your financial plan.
4. Have you saved enough money for an emergency fund?
Depending on your lifestyle, monthly bills, income, and dependents, save three to six months’ worth of expenses.
This sum may sound daunting, but you can save a little each week to reach it. Adjust the amount based on bill obligations, family requirements, employment stability, or other variables.
Emergency funds should be kept in an interest-bearing account that can be accessed without taxes or penalties.
Mutual funds, equities, and other assets may lose value if emergency funds are withdrawn hastily.
Emergency savings should be in an easily accessible account to avoid early withdrawal fees like a CD or IRA (IRA).
5. Best way to save money?
High-yield savings accounts are a great alternative for both your emergency fund and your short-term savings because they are not affected by market swings and are usually FDIC-insured.
They are also useful when saving for certain goals. The majority of demands that may be met within a span of 1-3 years, such as tuition or a car loan, are well-served by this method of saving.
A simple online savings account, such as those offered by CapitalOne or American Express, will allow you to earn interest with no risk. In most cases, you may get your money quickly, there are no fees, and you can access it from your mobile device.
6. Do you have additional money on hand?
When you need extra cash, U.S. Treasury securities are another possibility. This includes treasury banknotes, notes, and savings bonds.
Treasury bills (a time frame of one year or less) and Treasury notes (2-10 years) have all yielded in the 3% area in recent months, as interest rates have risen.
Due to inflation, Series I savings bonds have a higher yield (9.62% through October 2022). There are restrictions, such as a one-year lockup period and a $10,000 per person per year cap.