Planning for the expected and unexpected requires putting money away for short-term and long-term goals. The purpose of each of your goals will determine whether the money should be put into deposit accounts or investments. In addition to knowing where to put your money, you need to be familiar with saving and investing concepts.
The WEALTH for the RIGHTEOUS newsletter will cover saving and investing products and concepts such as Asset Allocation, Bonds, CDs, Compound Interest, Diversification, Dollar Cost Averaging, DRIPs, FDIC Insurance, Fees, Financial Professionals, Index Funds, Investor Protection, Money Market Accounts, Money Market Funds, Mutual Funds, Stocks, Treasury Securities, and more. Our planning guides will provide details on some of these topics. This Saving & Investing section features articles that give guidance for meeting your financial goals.
Make a Financial Plan
The first step to investing is to make sure you have a financial plan. Ask yourself what you want. List your most important goals first. Decide how many years you have to meet each specific goal, because when you save or invest, you’ll need to find an option that fits your time frame. (See Make a Financial Plan)
Gauge Your Risk Tolerance
What are the best saving and investment products for you? The answer depends on when you will need the money, your goals, and whether you will be able to sleep at night if you purchase a risky investment (one where you could lose your principal).
For instance, if you are saving for retirement, and you have 35 years before you retire, you may want to consider riskier investment products, knowing that if you stick to only the “savings” products or to less risky investment products, your money will grow too slowly. Or, given inflation and taxes, you may lose the purchasing power of your money. A frequent mistake people make is putting money they will not need for a very long time in investments that pay a low amount of interest.
On the other hand, if you are saving for a short-term goal, five years or less, you don’t want to choose risky investments, because when it’s time to sell, you may have to take a loss. (See Saving vs. Investing)
Diversify Your Investments
Diversification can be neatly summed up as, “Don’t put all your eggs in one basket.” The idea is that if one investment loses money, the other investments will make up for those losses. Diversification can’t guarantee that your investments won’t suffer if the market drops. But it can improve the chances that you won’t lose money, or that if you do, it won’t be as much as if you weren’t diversified.
Avoid the Costs of Delay
Time can be one of the most important factors determining how much your money will grow. If you saved $5 a week at 8% interest starting from the time you were 18 years old, by age 65, your savings would total $134,000. If you wait until you are 40 years old, you’ll have to save $32 a week to have $134,000 at age 65. In fact, just one year’s delay – waiting until you’re 19 years old to start saving $5 a week at 8% interest – will cost you more than $10,000 by the time you’re 65.