Savings and Investment


Savings and Investment – Your Passport to Wealth

The Bottom Line: Creating a budget, monitoring your credit, setting financial goals, paying off your debt all lead to a single destination - building your wealth. In order to build a solid financial future, it is important to allocate money each month to savings, retirement, and investment accounts. Diversify your portfolio so that your investments match the type of risks that you are willing to take. Start by building an emergency savings fund, so you can weather a financial setback. Save for important purchases, like a home or car, so you can do so with no or limited borrowing, as well as having enough money to avoid carrying credit card debt. Taking your money and increasing it through investments requires knowledge, so be prepared to study. It can be very wise to hire an experienced financial adviser to provide expert advice. Avoid any get rich quick schemes and exercise extreme caution with anything that sounds too good to be true.

Thinking of buying a fancy home entertainment system, refrigerator, or taking that dream trip to Paris? Maybe you are wondering how to put your kids through college, or want to prepare for an early retirement.

One way to finance your dreams and basic needs is to pull out your credit card. There is nothing but your own discipline to keep yourself from running up credit card debt and then making minimum payments until you max out all of your credit cards.

However, anyone who has been in debt knows that setting financial goals, charting and tracking their financial situation and sticking to their plan is the best way to successfully become debt free.

When you no longer have debts, revisit your budget to further cut expenses and devote more resources to savings and investment. Then, the fun begins.

Here are some basics to help you get on the road to building wealth:

  • Be informed: Risks, returns and diversification
  • Set up different accounts
  • Wins and losses

Savings and Investments: Be Informed

Creating a financial plan helps allocate your income between spending and saving. In order to stay out of debt avoid the charge it  and make minimum payment debt cycle. Use healthy debt, such as a mortgage or student debt for the right kind of degree, to help you build your  income and wealth. Avoid high cost interest loans (or credit card debt) that turn even a bargain purchase into a very costly transaction. Take the right steps to build a strong credit score, so you can qualify for the lowest rates available if you do finance any purchase.

Here are a few basic financial rules:

  1. The higher return, the more risk you are taking. Don’t expect to get a risk free return at a high guaranteed interest rate. Rates are constantly changing, but at any given time, FDIC guaranteed bank deposits or government bonds are the lowest risk savings accounts (and often referred to as risk-free investments). Currently, the yields are very low, but they do offer liquidity. Whenever you invest money, you are taking risks. Choose the type of investments that best fit your financial goals and risk aversion level.
  2. If it is too good to be true, then beware. There is no such thing as a risk free investment that always brings a positive return. There is no such thing as a risk free quick return. Sure, you might be lucky and win the lottery or are introduced to a financial wizard that makes the right move. However, the chances are that any too good to be true scheme is just that - too good to be true.
  3. Diversification is a key to achieving a reliable return. The old adage of not putting all of you eggs in one basket is a financial truism. Some investments do better in a recession and others in a boom economy. Real estate varies greatly by location. Diversification is a key to maximizing your returns within your risk level and protecting you from being wiped out if one investment area collapses.
  4. Be informed and get professional advice. Finding the best CD is relatively easy. You can research online and make a deposit into a FDIC insured account. However, choosing a stock, bond, or real estate investment is complicated. It is best to use professional advice. Depending on your assets and portfolio, consider using an investment advisor, tax preparer, and estate lawyer. Before using any service get recommendations from people you trust and do the proper research to avoid scams.

Savings and Investments – Set up Different Channels

Diversification is a key to building wealth, as previously mentioned.

Here are some steps to consider:

  1. Create an emergency fund through a liquid savings account. The goal of this account is to have funds available for a medical emergency or unexpected expense. Standard advice is to put aside six months of living expenses.
  2. Create a savings plan for making larger purchases or to take vacations. Even if you are not getting a big return, you will save money by avoiding using credit card or personal loans at high rates.
  3. Top off your retirement account. For many, retirement accounts have two big advantages. First, you receive tax benefits, either at the time of the deposit or at the time of the withdrawal. Second, if your employer matches your retirement contribution, it is ideal to take full advantage of the match, as long as you don’t put in money you’re going to need in the short or mid-term. In general, retirement accounts are not liquid and you will be hit with penalties when making a withdrawal. Match your retirement account strategy with your age, investment goals and risk levels.
  4. Investment accounts are a great way to build wealth. Mix your investments between stocks, bonds, mutual funds, and other financial instruments. Keep in mind that markets fluctuate and investments are a long-term venture. Avoid panicking and readjust your portfolio based on your goals.
  5. Real estate is another popular investment. Your primary home is one form of investment. Buying another property to rent out or to fix and flip are investments that require specific skills. Before buying a rental, be sure that you understand what it takes to be a landlord. Don’t take on the project of flipping a house because you’ve seen it on TV. How you pay for an investment property has financial and tax implications. Before making a real estate investment consult with your tax advisor and trusted real estate agents to understand the advantages and disadvantages.

Savings and Investments – Wins and Losses

Paying off debt is a sure win. Paying off high interest debt, or staying out of debt if you never were in debt to begin with, is the first step to building wealth.

But, don’t stop there. Leverage your experience to fine-tune your budget and allocate increasing amounts of funds to savings and investment accounts.

However, don’t always expect to win. Investing is not a science; returns come with risks. Sometimes your dream stock is going to go bust. Anyone who invested in the 2006-2008 period watched investments go from boom to bust. Even stocks and bonds that were considered low risk bottomed out.

By investing for the long run, you can avoid selling in a panic and overinvesting at a peak. With perseverance, you will not only be debt free, but build your nest egg and net worth so you can maintain a comfortable lifestyle even after your peak earning years are behind you.