Investing

Before investing…Saving is the First Step
Before beginning to invest, it is important to have some savings or an “emergency fund.” 

What is the difference between saving and investing?

Saving is the choice to spend less than what you make and put that money away. It means having an adequate amount of money stashed away for emergencies and short term goals. It is the start of building a sound financial foundation. Savings mean you are not living paycheck to paycheck. The first step is establishing an emergency fund to cover those unexpected things that happen in life! When you have that in place, you are ready to start investing. 

Investing, on the other hand, focuses on increasing net worth (See: How much are You Worth? --450KB .xls) and achieving long-term financial goals. Investing involves risk (you can lose your money) and is to be considered only after you have adequate savings.

But first let's talk about where to put your savings...

Where to Stash Your Cash

Your emergency fund cash should be somewhere safe and easily accessible like a savings account.  Safe means you will not lose your money. Banks are insured by the Federal Deposit Insurance Corporation and credit unions are insured by the National Credit Union Association. This means savings accounts are insured up to $100,000 per account. Accessible means you can withdraw your money quickly without fees or penalties.

Where can you find a savings account?

Savings accounts (23KB pdf) are available through banks, credit unions, & virtual banks. Many banks and credit unions are referred to as “brick & mortar” because they have a physical building.  “Virtual banks” conduct business ONLY through the internet, email, or by telephone.

When opening an account you need to consider the following:

• Minimum deposit required
• Fees
• Access to your money
• Interest paid

 

Watching Your Money Grow...

We often talk about saving and investing as if they are the same thing. Actually saving and investing have some significant differences. As we mentioned, savings means your principal (the money you put in the account) is safe. However, the return rate for savings products means your money does not grow very fast.

Investments have the potential for higher rates of return over time. But return rates on your money are not guaranteed and it is possible to have low returns or even lose money.

It is important to put money towards both saving and investing. This way you have money for emergencies and short & long terms goals. For instance if you are saving for a down payment on a car that you will need in a year, you may want to check out savings products. On the other hand, if you want your money to grow so you can retire with a nice sum, investments might be a better option.

Try this drag and drop activity »

 

Why do return rates matter?

Return rates will determine how much your money will grow. According to Ibbotson Associate’s from 1926 -2007 the average rate of inflation was 3%. So if your money was not growing by 3% during that time, it was actually losing value. During that same time period, average return rates for S&P 500 stocks were 10.5 % and short term US Treasury Bills were 3.8%. 

Higher Return Rates Add Up

Suppose you contribute $20,800 of your income over 40 years;

• At 2.5% you would earn $14, 680 in interest and have a total nest egg of $35,480.
• At 8% you would earn $124,686 in interest and have a total nest egg of $145,486.

The higher return rate would mean that you earn $110,006 more on your investment. Of course, investment rates may vary over time and it is possible to lose money.

Compound Interest and Your Return »

Savings, Taxes and Inflation »

Risk and Return

Different types of investment come with different levels of risk.  Investments with the potential for higher returns usually come with a greater risk of losing money

If you want to find out more about diversifying to reduce risk go to Risk Tolerance »

Find out how much you know about investing! »



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