A fund is a collection of money from many investors. This pool of money can be invested in stocks, bonds, in a specific sector, or a combination of them. The main advantage of investing in a fund is the diversification it provides to us by spreading our risk. So, a fund can invest in places where an individual investor may not be able to.
Depending on how much money you invest in the fund, you’ll get a share in the fund. In investing theory, we call them units. So, the value of your units can go up or down based on the performance of the fund.
Funds can be actively managed or passively managed. In my next post, we will learn about these in more detail.
Where do funds invest?
A fund can invest in a variety of asset classes or in specific assets like only stocks or only bonds. The name of the fund usually states its purpose.
Equity funds, as the name suggests, invest in stocks, while fixed-income funds will invest in bonds – both corporate and government bonds. Some balanced funds invest in both stocks and bonds together.
Growth funds only want to invest in growth companies because they see a high potential for growth in these companies. Most technology companies are growth companies. This is the fast and furious approach to investing, where the fund manager will try to find companies with growing revenue, cash flows, and profits. These companies generally tend to be new companies, with a few exceptions.
On the contrary, Value funds invest in stocks of undervalued companies that pay high dividends. This approach is the slow and steady approach. Value fund tends to invest in companies that are well-established and mature. They usually offer investors a steady stream of income.
Funds could also be sector-specific, like energy funds that only invest in energy companies.
Some funds only invest in large-cap companies like those in S&P 500 index. So, when you invest in those index funds you are investing in many large-cap companies without bearing the risk of owning stocks of individual companies.
Investing in a fund that mimics a broad-based index will save you a lot of money. Also, most large-cap companies’ stock price trade at a very high value, and it will require a lot of money to buy several different stocks of different companies. Something that a lot of us can’t do.
You don’t need a lot of money to invest in a fund!
Did I tell you that you don’t need a lot of money to invest in a fund? Most funds like ETFs and index funds do not have minimum requirements.
A pool of money from many investors
So, hopefully, you got an idea about the purpose of the funds.
There are mainly four types of funds you will most often hear about
Mutual funds (actively managed by professionals)
Exchange-traded funds or ETFs (similar to mutual funds and stocks, could be active or passively managed)
Index funds (passively managed, my favorite)
Hedge funds (need a lot of money to invest in these, so many of us don’t qualify)
I will cover each of these in detail in my next post. So stay tuned if you want to know the advantages and disadvantages of each of these four and which one could be a better choice for a new investor.
In my previous post, I wrote about the various types of assets you can use for investment. To have a diversified portfolio, you should invest in a variety of assets.
Diversification can mean two things:
The first is diversifying within the same asset class.
So, for example, if you are investing in fixed-income securities, you need to invest in different types of those such as government bonds, corporate bonds, CDs etc.
Similarly, if you are investing in stocks, you should invest in multiple companies from different industries and sectors. But when you invest in individual company stocks, you may only be able to invest in 5, 10, or maybe 15 companies.
To achieve diversification using individual stocks, you will need to do a lot of research and invest a lot of money buying stocks from different companies in different industries.
Thus, if stocks comprise a majority of your investment portfolio, then your investment is risky because it is based on the performance of those companies you bought shares of.
So what’s the solution?
For a beginner investor, who doesn’t want to put too much money in several individual stocks, the best way is to start with investing in an index fund or a passively managed mutual fund.
What’s an index fund?
Index fund is a fund whose portfolio are built to mimic the constituents of a stock market index. The most widely used indices in the US are S&P 500 index or Dow Jones Industrial Average, or the Nasdaq Composite index.
Generally, Index funds should give you the same return as the index they follow. These funds buy all the stocks that are part of the index in the same proportion. So, it is like you have invested a little bit in each of those companies that comprise that market index. So yes, that would give you a very well diversified investment portfolio.
Also, index funds are less volatile and therefore are a good investment compared to individual stocks, esp. for long-term investing. So, they are a great option for investment for your retirement.
In my next post, I will argue why I like index funds more than actively managed mutual funds. I feel if you are sticking to read my post this far, you will be interested to know more.
Don’t put all your eggs in one basket!
The main point is to diversify so that if one sector or asset class doesn’t perform well, you don’t lose all your money.
The second key thing for diversification is having different asset classes in your portfolio, such as stocks, bonds, real estate, commodities, etc.
This brings us to the concept of asset allocation. Asset allocation simply means you decide what percentage of your money you want to put into each type of asset class.
Asset allocation will vary from person to person, depending upon their savings, age, risk tolerance and financial circumstances.
Finance theory suggests that generally, your investment in stocks should be 100 minus your age. So, if you are 25 years old, it should be 75% stock and 25% fixed income.
So yes, it means you need to keep changing your asset allocation as you grow older. Later in life, your investment in stocks should be less, and high in other fixed-income assets.
Now comes the million-dollar question.
When should you start investing?
The easy answer is now if you haven’t started already.
You can start investing as early as when you first start earning. Even kids can start investing their allowance money and add to it periodically.
Time plays a huge role in making your money grow, more than the dollar amount you invest. This is due to the power of investing!
Your money grows overtime exponentially!
If you are not convinced, you can take a look at my post here, where I explain this concept by using some simple examples.
How much money do I need to invest?
In the past, you would need a substantial amount of money to start investing. But things are much more simple now. With no minimum, no commission brokerage accounts, and fractional ownership of shares, you can start investing with as little as $10 a month.
You can set aside $1-$5 a day and make monthly contributions of $30-$150 a monthly.
These are some of the top brokerage firms in the U.S. – Charles Schwab, Fidelity, TD Ameritrade, and Vanguard. Stay tuned for my post on how to open a brokerage account!
I hope you found this information useful, I will cover Real estate and commodity investment in another post! But this is useful info to start investing now.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice on an individual basis.
After we have established 6 months’ worth of saving in a bank for our emergency fund, what do we do with our remaining savings? Finance experts will tell us that if we want our money to grow, leaving the extra money in a bank will not take us anywhere. So, the best strategy is to invest your extra money.
Now the question arises, without proper financial literacy, how do we know where can we invest our money? In this post, I will tell you some of the asset types where you can invest your money.
Also, you will learn why diversification is very important for investing. By diversification, we mean, having a variety of assets so that if one asset doesn’t do well, you don’t lose all your money. This will also allow you to minimize risks from fluctuations in return from each asset class.
Let’s begin by understanding an asset class!
Asset class means a group of assets that display similar features. These assets will have similar risks and give you similar returns. They are also usually subject to similar tax laws.
There are several types of asset classes, such as
stocks or equities,
fixed income assets (bonds and CDs),
mutual funds, ETFs
Cash and cash equivalents like money market funds
commodities like gold and silver, oil, etc
real estate (property)
Asset class and allocation are very important concepts in investing. They help you diversify your investment, so you can have a well-balanced portfolio. I will cover more on asset allocation in another post.
In this post, I will cover the first two types of assets
Stocks
Stocks are the shares in a company. People who buy a company’s stock actually get a share of ownership in that company. Companies typically issue their stock in the Initial public offering (IPO) to raise money (capital) for its growth.
Stocks or shares mean the same and I am using them interchangeably throughout this post. Similarly, you can either say stockholders or shareholders, they are the same.
When we buy stocks, we get payments in the form of dividends. When the company is doing well and earning profits, it pays its stockholders a share in the profit called dividends.
Another way we get earnings from stocks is when the share price of that company increases, also called capital appreciation. This could be due to the company’s good earnings or any positive news in the company. The company’s share price reacts to the news as the market values its worth more now.
Is there a safer way to invest in stocks?
The answer is yes if you follow certain rules.
The first thing to understand is that finance theory and the supporting research show that no one can beat the market. Even seasoned investors, like, Warren Buffet don’t recommend cherry-picking a few stocks, esp. for someone who is not a very risk-taking person.
A company’s shares can fluctuate a lot due to various reasons. People who think they can predict a company’s performance and hence its share price doesn’t know finance theory that well.
Most of the time, people don’t have enough time to research individual companies. Also, investing in a variety of companies to make a truly diversified portfolio may require a lot of money.
A good strategy for a new investor is to invest in an index fund that mimics the market such as an S&P 500 in the US. An index fund is a type of mutual fund that buys all the stocks that make up the market index in the same proportion. So, the money that you earn from investing in an index fund will be very similar to the return on the index it mimics.
Another key feature of Index funds is that they generally follow a passive, rather than active, style of investing. This means they maximize returns over the long period by not buying and selling securities very often.
Because index funds are diversified, you don’t lose money when some stocks don’t do well. Index funds mimic the market and are less volatile and over the long term (like 10 years or more), they give good returns. Don’t put all your eggs in one basket rule should be the most important thing to follow when investing.
The second way to minimize risks is to use a strategy called dollar cost averaging, where you invest a fixed $ amount every period, monthly, weekly, etc.
I didn’t want to make this post super long that you loose interest, so if you want to learn about dollar cost averaging, you can read my post here.
Let’s quickly turn to our fixed-income assets. The first one is bonds.
Bonds
Unlike stocks, if you buy a bond of a company, it doesn’t give you ownership in that company. Bonds are actually a loan a company takes to raise capital.
Both individual companies and the government need to raise money and thus, issue bonds. Thus, when we buy bonds, we get interest payments on the money we loan to a company or the government. Along with interest payments, at the end of our loan period called “term”, we also get our Principal amount back.
Bonds are part of fixed-income investments. As the name suggests, they give a fixed amount of income with regular interest payments until maturity.
Other fixed income assets include Certificates of deposits (CDs), municipal bonds, t-bills and t-bonds.
Just like stocks, we can invest in fixed-income securities directly, or through Electronically traded funds called ETFs and mutual funds or index funds.
As a bond owner, you bear less risk and you will get the interest amount, irrespective of how the company performs.
Thus, a good part of owning a bond is that, if a company does bad and goes bankrupt, the bondholders still will get their money back. The company can pay them by selling their assets such as their buildings, factories, etc.
However, this is not the case with shareholders. During bankruptcy, the stock price of the company crashes to a very low mark, and shareholders could lose all of their investments.
Treasury bonds are considered very safe investment options. It is like lending money to the US government.
Stocks usually pay more than a bond, but owning a stock is riskier than owning a bond. So, your decision to invest in stocks or bonds should depend on how quickly you want to grow your money and how much risk you are willing to take.
So which one should we invest in?
The answer is in everything. We all should have a diversified portfolio, consisting of stocks, bonds, and other assets, like commodities, real estate as well. Although this post covered investment in stocks and bonds, we can have a portfolio with more types of assets.
Your age and risk tolerance will determine the percentage of each asset you should keep in your portfolio. For younger people, investments in bonds shouldn’t be the main part of the portfolio, simply because they don’t pay as much as stocks do.
However, as we approach retirement age, our ability to bear risks falls. So, more investments in fixed-income assets like bonds, should be done later in life.
I hope you found this post useful. Stay tuned for my next post on asset allocation and diversification.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make investment decisions.
In my earlier post, I wrote about ways to fund your child’s college education. One of them was opening a 529 account. In this post, I will talk about what these plans are.
529 plan is a tax advantage account, where people invest money to fund the college education of their kids. You can open an account for your education as well.
529 plans are state government-sponsored plans and each state has its plans.
Advantages of 529 plans
The first advantage is that you invest your post-tax money and it grows tax-free. This is similar to a Roth IRA or 401 K. The other advantage is that there is no maximum contribution limit.
Additionally, if the original beneficiary can’t use his account for any reason, there is an option to change the beneficiary anytime.
Who can open the account?
Mostly parents or grandparents open this account to fund money for their child or grandchild’s higher education.
Anyone with a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) can open this account. Though non-U.S. citizens living outside the U.S. can’t open the account, they can still contribute to a child’s 529 plan.
Also, anyone can contribute to a 529 plan, a grandparent, a friend, or a relative.
Only U.S. citizens or resident aliens with a Social Security Number or Individual Taxpayer Identification Number can be the beneficiary.
Also, you don’t have to be a resident of that state to apply for that plan. Most states offer it to both residents and nonresidents. However, there are six 529 plans that are only available to in-state residents:
Savings plans: This is where you are building up money, which you can use toward almost any college tuition and related expenses in the US. This can also be used for K-12 education as well.
Prepaid tuition plans: This lets parents lock in today’s tuition rates for a child’s future education (but may limit where a child can go to school). The money can’t be used for room and boarding.
Choosing the right 529 plan
Savings plans tend to be more popular than prepaid tuition ones, as they are less restricting. Not all states offer prepaid tuition plans.
Many families choose their state’s plan because their state can offer more tax benefits to them. However, you are free to choose any state’s plan. One tip is to compare different plans and choose the one with a low expense ratio.
Disadvantages of 529 plan
Since the money invested should only be used for education purposes, if you use it for anything else, you pay a 10% penalty and will owe taxes on the capital gains.
Also, you can’t control which assets these plans invest in.
Should you invest in 529 plan?
Despite these limitations, it is still a great plan for funding college education if you think your child will go to college.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice.
Before I answer this question, I want you to look at the income of people with a college education vs people who don’t. Publicly available data and our observation show that people with a bachelor’s degree or a master’s degree get higher-paying jobs.
Below chart, I copied from the U.S. BUREAU OF LABOR STATISTICS. It shows the median earnings by education level in the United States from the 2021 population survey.
People with bachelor’s degrees earned 48% more than people who don’t complete their degrees. Clearly, completing the degree has a huge positive impact on median earnings. Also, people with professional degrees such as doctors, engineers, and lawyers earn even higher amounts.
Ways of funding college education
How to fund their child’s higher education is an important decision all parents will have to make at some point. Planning early for a college education is better than planning later and it is esp. true when you have more than one child.
In the US, there are several ways you can do that:
529 plan
You can create a college fund using a 529 plan. A 529 plan is a tax-advantaged college savings account offered by either your state government or college.
The tax advantage is the main benefit of it. Tax advantage means you invest your post-tax money, but it grows tax-free. Also, when you withdraw your money for college, you don’t have to pay taxes on it, as long as it is used for education purposes.
If you are aware of 401k plans, 529 plans are similar to those. However, this money you withdraw can only be used for education. There is a penalty of 10% for non-educational use and you will have to pay income tax on it.
To know more about this option, you can look at this website for all the details.
Loans
If you can’t afford to pay for your child’s college education from your own savings or investment, you can borrow.
I am going to get a little sidetracked here, but from what I learned from various finance books and legit websites is worth sharing. I feel borrowing for good investments pays off in long run.
Loans taken for higher education, starting or growing a well thought business, or real estate are all good investments. As there is a very high chance of you earning more from these investments. It is like you are investing for your future. So even if you have to pay interest on your loan, your earnings increase much more in comparison, to compensate for it.
However, borrowing to pay for things that will ultimately depreciate, such as cars, furniture, and vacation isn’t worth it.
Coming back to the topic, alternatively, you can also borrow for higher education if your savings or investment can’t cover the cost.
Take loans from either the Federal government or from private banks
These student loans can be used for tuition, accommodation, books, and other miscellaneous costs related to college. The interest rates on Federal loans are usually lower compared to private banks.
As of today, interest rate on federal unsubsidized loan is 4.99% for bachelor’s degree and 6.54% for professional and graduates degrees. The repayment period defaults to 10 years but can be extended up to 30 years. For more info, you can refer to the Federal student loan website.
On Aug. 24, 2022, the U.S. Department of Education (ED) extended COVID-19 emergency relief for student loans through Dec. 31, 2022. Please see here for more details.
For the undergraduate level, you can borrow each academic year between $5,500 and $12,500 depending on your year in school and dependency status. For graduate or professional level, you can borrow up to $20,500 per year.
Types of Federal loans
The main difference between Direct Subsidized Loans and Direct unsubsidized loans is the financial need element. Direct subsidized loan are available to undergraduate students with financial need, so the US government pays interest on your behalf.
Direct unsubsidized loans are not based on financial need and hence you pay the interest on the loan. On these loans, interest accrues (adds up) every day.
Borrow from private banks
The other option is to borrow from private banks. Usually, the rates are higher than Federal student loans.
With private loans, the payments get due while you are still in college. In the case of a Federal direct unsubsidized loan, payments are not due until after you graduate.
My two cents
Get higher education even if it requires borrowing. Also, you have to understand how much money you should borrow. The main aim is that it should cover your tuition and basic living expenses, if you are staying away from home.
It may be tempting for you to go to a great location, a beautiful campus, and choose a college with the best athletics. But, you should decide if taking a bigger loan for these extra amenities is even worth it, esp. when you have to pay interest on your loan.
Another option is to check with a nearby college. From my experience, degree from UCLA or USC counts equally well as a degree from UC Berkeley, if you are applying for jobs in and around LA. If your nearby college has a decent rating, living at home and attending local universities will save a lot money on accommodation.
Some kids also join two years of community college and then attend two years at their local public university This is a much cheaper option and can save you thousands of dollars.
Also, make sure to submit your student loan FAFSA (form) as early as possible for the best grant and loan opportunities. You can also check for grants or scholarships from your local civic organizations, your local community colleges and universities, and even your parents’ employers.
I hope you found this information useful. Adios, until next time!
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice.
Who doesn’t like to see some extra money in their savings without having to sacrifice their living standard?
Saving is the money left after subtracting all our expenses from all our income. This is, after all, the money you can ultimately invest and grow. Well, there are two ways to save money.
Yes, you guessed it right, either you increase your income or reduce your expenses. In this post, I will focus on the latter.
I will share some easy ways for you to reduce your monthly expenditures, without even feeling it. While some of these may seem common sense, it is still good to read this article. Maybe, you will find one particular option, which I am going to list below.
I am combining personal finance and human psychology with my favorite economics knowledge to come up with some doable changes we all can implement. So without further ado, let’s get into it!
Cut Down on Streaming services
To start with, please cancel any unnecessary online streaming subscriptions. Many times, we take too many streaming services that we don’t even use much. Honestly, on average, if you are working or studying full time, how much TV do you get to watch every day? Maybe a couple of hours, max?
So, yes most people do not get the time to watch that much TV and we often end up paying too much for each service. So you should consider how many of these you can’t live without. Even though their monthly fees don’t seem that much individually, together they all add up.
Is Gym membership worth it?
Think about marginal benefit vs. marginal cost of Gym membership
Unless you use the gym 4-5 times a week, paying $20 or so per month isn’t worth it. We get tempted by their deals and may use them for some time in the beginning, but most of us are not able to continue for whatever reason.
I am totally in favor of exercising and maintaining a healthy lifestyle. And there are free resources for that. You can always start with walking or jogging outside or jump roping. You can also do yoga and make use of many free online exercise videos or free cardio classes. These will all give you the same results if done 3-4 times a week for 30 minutes a day.
Do you still use Cable TV?
In a world where there are so many streaming services, I honestly think we don’t need cable TV anymore.
I find that a lot of time is taken by the ads shown, and we don’t have the option to skip ads, in cable TV. Honestly, most people just flip between channels waiting for the ads to finish. What a waste of time!
Consume less electricity during peak hours
For most places, peak hours are between 4 to 9 PM. This is when you get charged the most. So try not to use your dishwashers and washers during this time if you can. Also, Having an app like Nest will help you monitor how much your AC is running and how to control it. I found some additional ways to reduce your electricity bill in this post in case you are interested.
Refinance your loans
If you follow my posts and the news, you must be aware that the Fed has (indirectly) raised all the interest rates that affect us. This includes our home loans as well. The Fed has clearly stated that to fight inflation, it will further raise interest rates. So there is still time for you to refinance some of your loans for a lower rate.
So anytime, you find interest rates lower than usual, don’t miss the opportunity to refinance your mortgage.
Eat out less
Well, this goes without saying, right? I understand everyone can’t have a home-cooked meal every single day. We also need a break and eating out provides us with that happy feeling. But if you can, try to slowly decrease the number of times you go out to eat. For example, start by reducing it by 25% and gradually increase it.
There will be two advantages to it. Not only you will save money on restaurant bills, but you will also be able to have a healthier life. To get to this, you will certainly need better meal planning (esp. since we all live very busy lives). Nevertheless, it is doable if you incorporate simple and healthy options to cook. One way to do it, which I sometimes do is to make extra servings of the food in an instant pot and use my freezer to save it for the future.
Avoid instant online shopping temptations
When we pay with credit card or debit card, often times we don’t know how much money we have spent. We easily fall prey to online shopping deals and offers. Studies have found that the pleasures of online shopping release dopamine, a happy hormone.
Oftentimes, we just want to buy something because we see others using it. Here, we need to stop and think if we really need it. Is this really adding value to our life?
An additional tip is while buying clothes, shoes, and accessories, try not to do too many one-time-use purchases. Buy something that you can use more often. We all need a few party wear and special occasions outfits but just choose the number wisely. We work hard for the money and we need to use our judgment while making any purchase.
Most of the time the pleasure we get by making any purchase is very short-lived. We suffer from something called “shiny object syndrome”. So always think before giving to this instant online need to splurge. One tip is to leave the item in a shopping cart for a few days and then decide if you still need to buy it.
Return options
Many of the companies we buy from these days, offer return services, some up to 90 days or more with a receipt. We procrastinate returning because of this long window and may forget to return the item. I am sure it has happened to some of you. So either set up reminders or do it as quickly as you can to avoid sitting with that item.
Be cautious of free trial magazines and other services
Sometimes, we take a service, which is free for a trial period. Usually, these services require us to give the payment information even though they don’t charge for the trial period. They also give the option to cancel the service anytime during the trial period. But life happens and we may forget to cancel it.
Then unknowingly, we get charged for a whole year. Be cautious of these. I would suggest not falling for these offers unless you are very disciplined and can keep track of all your free trial subscriptions. One way to avoid getting charged is to set reminders on your phone to cancel before the free trial period ends.
So, these were some of my tips for reducing your expenses without substantially affecting your lifestyle. I am sure there are many more, so feel free to share those in the comments section below. In my other post, I will also cover some ways to increase your income.
I hope you learned something from this personal finance post series. Please leave your comments on what type of posts you would like to read, it will help me connect with my readers more. I hope you are having an amazing day and I will be back soon with another topic. Thank you for reading till the end!
Today, I will introduce you to a very useful concept called Dollar-cost averaging. It is an investment strategy where you invest a fixed amount of money every period, such as every month, despite the stock market trend. You could invest your money in an index or mutual fund, or electronically traded funds (ETF).
So, no matter how the stock market behaves if you keep putting in a fixed dollar amount every period, over the long run, it will surely give you good returns.
Let’s understand this with a help of an example. The dollar amount you contribute each period, divided by the stock price, gives you the number of stocks you buy for that period. So, when you invest a fixed dollar amount (let’s assume you contribute every month), you end up buying fewer stocks when the stock price is high.
Conversely, when the stock price falls, you buy more stocks for the same dollar amount you invested during that month. This way, your average purchase price per stock stays low over time.
There is an excellent example explaining dollar cost averaging that I found on the Charles Schwab website.
To be a successful investor, you need to have patience and invest for the long term. People expect their money to grow overnight and this certainly doesn’t happen.
Why people need to use this strategy?
People try to buy stocks when their prices are falling and sell when they are rising to make profits. But it is very difficult to time the market. There is no foolproof way to know how the stock price will behave the very next day or coming days.
Sometimes, you may buy a stock thinking it is selling at a low price and will rise in the future. If the stock price rises and continues to rise, you made a good investment decision until you sell it at a higher price and make a profit. However, if the stock price falls further for the next few days, and you end up selling it at a lower price than you bought it for, you made a mistake.
Dollar-Cost Averaging
In reality, people panic and start selling individual stocks when the stock prices are going down. This is actually the wrong thing to do.
Also, people, sometimes, don’t buy those underpriced stocks thinking they are not performing well and will continue to fall.
We, as individual investors don’t have enough information about a specific company and other economic events. Hence, our guesses about market stock price and index movements are not always correct.
How does Dollar cost averaging help?
This can be avoided when we invest a fixed dollar amount. With dollar cost averaging, you can stick with a good investment schedule and will not overthink about when to buy or sell stocks.
I like to invest worry free
Thus, a big advantage of dollar-cost averaging is that it is a worry-free method of investing. The emotions and anxiety associated with investing are taken out and you just invest a fixed amount at a fixed time (such as every month), ignoring the market ups or downs.
An example of dollar-cost averaging investing would be the investments done through your employer’s 401k plan. Here you and your employer contribute a fixed amount of money towards your retirement income.
I hope you learned something from my post today. If you haven’t already, you will start making use of this useful technique in making your investment decisions. Also, please start early, as time is the key. After creating the emergency fund in your savings account, invest your money so it can grow.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make investment decisions.
Saving is the extra money we are left with after meeting our expenses from our income. It is the difference between our total income and our total expenditures.
There are several things we can do with that extra money. We can either leave it at home (the worst option) or keep our extra money in a bank, such as in a savings account or invest it.
In this post, I will cover how much money we should save in a bank vs investing it to grow it.
Advantages of having a savings account in a bank
First, and foremost, we need to understand money loses its value over time because of inflation. So, even though the interest paid on a savings account is not very high, we still get some interest to compensate for loss happening from inflation. Thus, it is certainly better than keeping it in your house, as you don’t earn any interest when you keep it at your house and will lose its value due to inflation.
However, the best part about a savings account is that your money is safe in a bank, as most commercial banks in the US are insured by FDIC. FDIC is Federal Deposit Insurance Corporation that insures that will not lose their money if that bank goes bankrupt.
In other words, people who deposit money in a savings account protected by FDIC for up to $250,000.
So, when looking for a savings account, make sure your bank has FDIC insurance. Also, if you want to select a bank for a savings account, you should look for one that charges the minimum fee for you to hold an account.
Another important use of keeping money in a savings account is that you can withdraw it for expenses such as a down payment for a car or a house.
Get that Emergency fund established first
People also keep money in their savings accounts for emergencies. I strongly feel everyone should create an emergency fund. If something were to happen to our income, we should have at least 6 months’ worth of money to survive.
So, keeping money in a savings bank doesn’t make you rich, but it helps in creating an emergency fund and meeting some big expenditures. So before, we start investing, we should have at least 6 months’ worth of money in a savings account for emergencies.
This can change based on the size of the family and sometimes people need up to 12 months’ worth of expenses if the family size is big.
Anything after that, we should invest if we want our money to grow.
What do we mean by investing?
In finance, investing means when you invest your extra money with the hopes to grow it. The most common forms of investment are stocks, bonds, an index or a mutual fund, commodities like gold and silver, and real estate (property).
If you are interested in learning more about these options, you can check out my post here.
Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make any investment decisions.
