In the first post on this topic, I introduced the basic differences between the mindset one has for saving and the mindset one has for investing. I realize its gonna take some convincing for a lot of people to want to take on the risk of investing, but in realizing that I should also let the savings minded people know of the options available.
Regular Bank Savings Account
Many people have checking accounts with their banks but according to a MarketWatch article, more than 20% of Americans DO NOT have a savings account. There is an incredible graphic in this article that explains how 22.4% of Young Millennials (ages 18-24) and 18.0% of Older Millennials (ages 25-34) do not have a savings account. And on top of that if people in those same age brackets have an account, 21.8% and 26.3% respectively have a $0 balance in those accounts.
I'm not going to leave the Gen X and Baby Boomers out because for those metrics to be on average 21% without a savings account, is worrisome. For Gen X (Ages 35-54) and Baby Boomers (Ages 55-64) the primary focus should be "what happens when I retire?" Understanding that Social Security and company pensions are sometimes still on the table for these generations, having that emergency fund available is key for any unexpected house, medical or car expense.
Certificate of Deposits
Also known as CD's. These particular products are generally offered through your bank or credit union and you can buy into them given an initial deposit as low as $1,000 (at some credit unions) to $2,500 (at some federal banks). The initial deposit varies based on where you are located, the bank or credit union CD offerings and the time period that you are choosing to hold on to this CD. But bottom line is your money in these CD's is insured and pretty much guaranteed. CD's offer a stable interest rate on the investment and the farther off the maturity date is for the CD, you generally get a higher interest rate to compensate. Now the only thing to this is that you MUST leave your money alone for the duration of the CD. If you don't and you try to pull your funds out, the fee's can be sickening.
Money Market Deposit Accounts
Companies sometimes need help covering monthly expenses or are looking to make a quick transaction. They look to banks who have money market account holders to provide them the quick cash they need. Banks in return provide that cash from the money market accounts, and the company pays interest rates according to the federal prime interest rate back to the bank. The bank then gives the interest back to the money market account holders. The variable interest rate is the biggest difference between CD's and money market accounts, which makes CD's a more appealing offer to many risk averse people.
*FYI* Federal Prime Interest rate is the same rate available to people looking for personal loans, small business loans and mortgages.
529 College Savings Plan
For those of you who have children, this may be a good option for you to jumpstart college saving. Generally all state sponsored plans are available to everyone in the country and can be used at any eligible college or university. The rules vary by state, but since I love North Carolina so much, I'll explain more about that one.
The withdrawals from the NC 529 Plans are federal and state income tax free if they are used for anything related to higher education costs like books and tuition. This plan allows you to chose how much to invest, how often to invest and even allows you to chose a plan based on your risk tolerance.
Of course this is an investment for your family's future and if you have kids that have hopes to pursuing higher education, this can be a good start for them.
Take away from this post is at the least, PLEASE OPEN A SAVINGS ACCOUNT WITH YOUR BANK. This particular account is the most accessible and liquid of the savings options you have. A traditional savings account is best to have to cover any emergency expense. Having even $1,000 in that account can be the difference between having cash to pay for a car repair immediately or having to go take out a high interest personal loan that may take a few hours for you to get the cash to pay for your car. But the issue doesn't end there. You still have to pay back the $1,000 loan, plus interest. So seriously, if you get nothing else from this post, get a savings account.
Until next post folks...
Showing posts with label Saving vs Investing. Show all posts
Showing posts with label Saving vs Investing. Show all posts
Monday, November 30, 2015
Wednesday, November 11, 2015
Saving vs. Investing
As we were growing up, we were probably exposed to ways to save money more than we were exposed to ways to invest our money. Parents buy their kids piggy banks to put coins in at a young age. Banks advertise incentives for opening a savings account with them and provide interest rates for letting your money sit there long term. Retail stores look to consumers and provide deals to save money on various items. There are even people who participate in “bedside saving” or the adult level of piggy bank banking and they stuff money in a mattress. Whatever the method you use, you’ve known about it for years and pretty clear on how it works.
But what about investing? What exactly is investing?
In all honesty, I call it glorified gambling.
On Wall Street, you take risks. You look at a company given as much historical information, news and analyst predictions that's available through various sites like Yahoo! Finance or Google Finance and you make a prediction on the future success of a company. If you think it will do well you invest, otherwise you may pass up that company or short sell it (future blog post).
But whether you invest in the stock market, your child's education, real estate or pursue venture capitalism, there is a level of risk that you take on as an investor similar to the way a bank does when someone asks for a loan. When banks are deciding to give an entrepreneur a loan, they are analyzing how much of a risk that person is and how risky the business that the person is trying to conduct is. And based on the risk tolerance the bank has, they can chose to accept it by taking on the loan with an appropriate interest rate assigned. For example, if I was trying to get a loan to start a smoothie stand, the banks would consider the location I'll be working in, the fact that I wont need any deep frying or heavy duty kitchen appliances and the fact that this stand is mobile so I can move to different locations for new business if necessary. They are more likely to give me a loan for that than giving me a loan for a business that was less stable and unproven to succeed or if my business plan was not well written.
This general concept of perceived risk and risk tolerance are two factors that are very important when deciding to invest. A third consideration is the duration of time in which you want to invest. When analyzing companies to invest in you have to know the type of risk you are willing to take and understand the business of the company that you are investing in. It also helps if you have a time horizon in which you intend to actively or passively invest.
Just in a nutshell, here are a few key differences between saving and investing.
In my Friday post, we'll be diving in deeper into how to measure your personal risk tolerance.
On Wall Street, you take risks. You look at a company given as much historical information, news and analyst predictions that's available through various sites like Yahoo! Finance or Google Finance and you make a prediction on the future success of a company. If you think it will do well you invest, otherwise you may pass up that company or short sell it (future blog post).
But whether you invest in the stock market, your child's education, real estate or pursue venture capitalism, there is a level of risk that you take on as an investor similar to the way a bank does when someone asks for a loan. When banks are deciding to give an entrepreneur a loan, they are analyzing how much of a risk that person is and how risky the business that the person is trying to conduct is. And based on the risk tolerance the bank has, they can chose to accept it by taking on the loan with an appropriate interest rate assigned. For example, if I was trying to get a loan to start a smoothie stand, the banks would consider the location I'll be working in, the fact that I wont need any deep frying or heavy duty kitchen appliances and the fact that this stand is mobile so I can move to different locations for new business if necessary. They are more likely to give me a loan for that than giving me a loan for a business that was less stable and unproven to succeed or if my business plan was not well written.
This general concept of perceived risk and risk tolerance are two factors that are very important when deciding to invest. A third consideration is the duration of time in which you want to invest. When analyzing companies to invest in you have to know the type of risk you are willing to take and understand the business of the company that you are investing in. It also helps if you have a time horizon in which you intend to actively or passively invest.
Just in a nutshell, here are a few key differences between saving and investing.
| SAVING | INVESTING |
|---|---|
| Saving is what you do so that you’ll have money at a moments notice. (Rainy day/emergency funds) | We invest with the mindset that we wont be needing that money for the next couple years. |
| Savings account reflect what you put in them, along with low interest rates. (generally < 1%) | A portfolio of stocks may lose value. |
| Safe bet you’ll get what you put in. | Potential for higher rate of returns and dividends, but higher risk of losing money |
In my Friday post, we'll be diving in deeper into how to measure your personal risk tolerance.
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