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Saving & Investing

Saving

Saving is setting money aside for something you want or need for tomorrow. It is extremely important to save a portion of any income that you receive with a good rule of thumb being 20%. You should always have money readily available in savings for emergencies.

You need to train yourself to make saving part of your routine.  Even if you are unable to save 20% now, the key is starting to save so you learn the habit. Once you can save more, you can adjust the percentage later.

Below are a few saving tips:

  • Pay Yourself First is an effortless way to make saving a regular habit. This can be done by having an amount deducted from your paycheck through automatic deductions and deposited into a savings account.
  • An alternative is to treat your savings as part of your budget each month so that you are regularly saving the same amount each month.

Types of Savings Accounts

Savings Account

A savings account pays a low interest rate and are often attached to a checking account so you can easily transfer money back and forth. You can typically make a limited number of withdrawals per month. A savings account is a good place for your emergency fund.

Money Market Account

Money market accounts have higher interest rates than checking and savings accounts, but money market accounts limit the number of withdrawals you can make. If you do not need your money for six months or longer, a money market account would be beneficial.

Certificate of Deposit (CD)

 A CD pays you more interest the longer you agree to lock away your money. Most CDs require a minimum deposit (usually from $250 to $1,000), pay a high interest rate and they do not allow any additions or withdrawals from the CD for the period of the CD (six months to five years). If you take your money out of a CD early you could be charged a penalty, usually equal to three months’ worth of interest.

Investing

Investing is the act of allocating funds to specific entities (such as stocks or bonds) to grow your money over time. College students and recent graduates often do not realize that they have the most powerful tool in their possession when it comes to investing to make money, which is time!

Investments in the market are not guaranteed to grow and can lose money, which introduces the main principle of investing: risk vs return.

Below are a few saving tips:

  • Invest in a wide variety of products to reap the benefits of multiple products and to reduce the risk of losing all your contributions on one product that underperformed.
  • Be patient!  Though returns will be small in the short term, the largest returns await you in the long term. If you withdraw your investment or interest earned prematurely, your total profits will decrease.
  • Investing consistently and early on, even if you can only afford small amounts at a time, will give you a leg-up until you are more financially stable.

Type of Investment Accounts

Mutual Funds

A mutual fund is a collection of different investment products pooled into one investment account that is professionally managed. While it is common for varying mutual funds to have different rates of return, it is rare to see this type of fund lose money.

Bonds

A bond is a loan you are making to the government or to a company. Typically, bonds have low rates of return because they are safe. A benefit to purchasing bonds are that they will pay monthly of your earned interest, and then return the original amount at which the bond was purchased at the end of the bond’s term.

Traditional IRA

Contributions to traditional IRA’s are taxed at the time of withdrawal. The benefit of Traditional IRA’s is that the gross amount that you contribute stays in the account without being tazed until the time of withdrawal, so a larger amount of your contribution can gain earning and accumulate interest. Both contributions and earnings are taxed at the time of withdrawal in a Traditional IRA.

Roth IRA

Contributions to a Roth IRA are taxed at the time of contribution. Because tax rates are based on your annual income, Roth IRA’s can be highly beneficial for young investors and college students, because typically people in this age group are in a much lower tax bracket than they will be as they grow older and advance within their careers. With this type of investment account, you may not withdrawal any of the earnings until you are approximately 60 years old, however you may withdrawal portions of your contributions at any point in time, penalty free.

Saving vs Investing

In general, we save for short-term goals and invest for long-term goals. A five-year timeline for savings vs investing is important because investing takes on more risk and takes more time. For example, if you are saving to put a down payment on a house within a few years, it may be too risky to invest that money in the stock market short-term.

Compound Interest is interest paid both on the original amount of money (the principal) and on the interest it has already earned. The earlier you start saving, the more interest you will earn.

For example, suppose Sara saves $100 a month for 10 years at age 25 and Belinda waits until she is making more money and then at age 40, she saves $100 a month for 20 years.

Who will have saved more money? Sara contributes $12,000 but ends up with $73,537. Belinda contributes $24,000 and ends up with only $46,435. The lesson learned here is that it does not matter how much you save if you begin to save early. The earlier you save, the more opportunity your money will have to grow.