For most of us, the day we start saving is the beginning of a whole new approach to money. No longer a matter of simply getting our needs met, or buying whatever shiny new toy strikes our interest, we begin to see the accumulation of wealth as a pursuit all its own. Saving brings us security, and can increase credit scores and financial standing.
Knowing that you're capable of eating your vegetables before dessert, so to speak, can give you the confidence to do a lot more of the mature and responsible things that will bear fruit in the future. Savings accounts, both long-term and token, are good ways to make sure that your family is taken care of in a fiscally responsible way. But the question remains: As your family and household increase in size and needs, what are the best, safest and most intelligent ways to save that money?
Savings is a necessity, regardless of your income, and while an emergency fund -- enough to cover six to eight months of your expenditures -- is the first goal, it's by no means the last. That means saving a portion of your income, no matter what it is. Specialized savings accounts -- Christmas clubs, college funds, or even just extra savings or money market accounts -- can help us condition ourselves toward saving as a natural part of the routine, which is essential.
The simplest solution is often the best, depending on your scale of income. For example, anyone with a checking account should have a linked savings account. Though various fees, minimum balances, transaction limits and the like can be associated with these starter accounts, those too can help teach the early lessons that will help us bridge to more complicated, high-yield savings solutions and products.
Of course, these are only beginner steps. The interest on a classic savings account is not usually too impressive, and a basic money market account isn't too much better. For greater yields, you're looking for investment products -- however, you must have a decent nest egg to get started there, which means saving using basic means and eliminating debt, before you can move on to investments, managed funds and the rest of your potential investments.
Retirement Funds and Managed Portfolios
Almost everyone has, at one job or another, found herself or himself the owner of an IRA, 401(k) or similar managed retirement account. The best choice for you -- between Roth and traditional IRAs, and Roth and other forms of non-IRA accounts, such as 401(k)s -- is very personal, and deciding what that is demands a realistic approach.
First, you want to think about how much you want to contribute each year, which means being realistic about your income, your expenses and other savings strategies you're using. There are different caps and different rules for early withdrawal that come along with each kind of account, and you have to be serious about what your future plans are going to look like in order to make the right choice.
Finally, figuring out the duration of your savings, or how long until you retire and can begin drawing on the funds in the account, is important. A person starting his family in the first years of a career has different expectations than someone nearing the age of retirement with an already healthy savings and investment portfolio.
Remember, with financial planning, we go for a balance between "worst case scenario" and "best behavior." If you're too idealistic about your own abilities to save, you could end up with a bunch of fees and restrictions if you have to withdraw or transfer funds early or too frequently. Think too pessimistically in the planning stages, and you won't save as much as you could because you won't be living up to a higher standard of savings.
Insurance Policies and Products
One of oldest forms of saving for our families, life insurance policies are a good way of making certain that you pass no future burdens to the next generation. Of the two major types, term and permanent, only the second option includes a savings quotient, but they're both ways to ensure your family is taken care of.
Term life pays out a fixed amount, only if something happens during the term of the policy: It's "insurance" in the simplest form of the word. Permanent life insurance comes in varying flavors, but basically comes down to the fact that you're growing cash value as you contribute to the account, usually through contributions to a portfolio in addition to savings in the main account -- and you can even borrow against it as it grows. (It's better not to do that, of course, but this illustrates how it works.)
A financial advisor can tell you lots of different ways to combine these sorts of policies with other products and solutions, or which policy is best for you. It's a complicated system. But for straight-ahead, interest-bearing death benefits, remember to buy when you're healthy, and concentrate on the rates involved. Simple in theory and sometimes complex in practice, there's still a reason this is one of the savings steps families have taken for generations.
Government Securities and Bonds
For another old-school solution, you can look into federal, state and municipal bonds. Each has its own terms, rates, policies and uses, but once that thicket's cleared, there is something satisfying about having the certificate in hand, ready to be hidden away or passed on to children or grandchildren -- and something lovely about contributing to the city, state or country where we live.
With a reputation for stability and a variety of options available -- Series EE bonds yield a fixed rate, while Series I is adjusted for inflation, etc. -- remember that you pay in interest for what you gain in risk. As the lowest-risk possible investment, you're getting a fairly low but stable rate of return. If you like the idea of owning a bit of the U.S., and don't mind leaving the money in the bond well past maturity in order to get a decent return, it's a pretty fascinating market to consider.
Middle-term Investment Products
Most of us have a basic understanding of products like CDs, money markets, high-interest savings and other kinds of low-volatility accounts. Keeping in mind that a credit union can often provide better rates and interest on accounts of this type, consider this: Retirement is what IRAs and 401(k)'s were invented for, so you should already be contributing to one or more of those before looking further.
That's the long view, as with life insurance, and it's important, considering none of us really knows our future earning potential. Your emergency fund should be accessible -- it's for emergencies, after all! -- and there shouldn't be a lot of penalties associated. The price you pay for accessibility, of course, is interest rate.
But for money that's not immediately necessary, but neither extraneous enough that it can go into your retirement fund (or, if you're really doing it right, what's left over after you've maxed out your contributions for the year), you need a middle option. That's when a portfolio or brokerage account -- if you're feeling lucky -- or a CD ladder -- if you're feeling prudent -- comes in handy.
Simply put, by engaging in a high-yield, short-term CD for the maximum amount, you can control your own compound by reinvesting at the end of each term period for a given term that you specify, meaning that if investing in a 10-year CD stresses you out this year (most CDs incur penalties if you withdraw your money early), you can take a 5-year option and see where you are when it matures. It's not instant access, but it's comforting in the middle-term.
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More Great Links
- Steiner, Sheyna. "Roth IRA, 401(k): What's the difference?" 2010, Bankrate.com. (October 24, 2011) http://www.bankrate.com/finance/retirement/roth-ira-401-k-what-s-the-difference.aspx
- Wang, Jim. "Basics of Treasury Bonds & Securities Explained". Jan 2009, Bargaineering. (October 24, 2011) http://www.bargaineering.com/articles/treasury-bonds-securities-basics-explained.html
- Yochim, Dayana. "The Best Parking Spots for Long-Term Savings". Motley Fool Online, Apr 2009. (October 24, 2011) http://www.fool.com/investing/general/2009/04/27/the-best-parking-spots-for-long-term-savings.aspx