SHOULD I INVEST MY SAVINGS? – HOW TO PLAN FOR SUCCESS
Overview
The more I’ve learned regarding personal finance, the more I’ve come to realize that, when managed correctly, money creates more money. By “managed correctly,” I mean invested wisely. This naturally led me to the question, “Should I invest my savings? ” After all, savings like sinking funds, downpayment funds, and emergency funds can account for a huge chunk of cash. Shouldn’t we put that money to work? Actually…
Savings and investments serve two different and equally important purposes. Investments are funded by money you’re using to grow your wealth and plan for your future. Savings are funded by money you intend to use in the near future, or are using as a type of protection against emergencies. With this in mind, I believe the best course of action is to keep savings uninvested, and as liquid as possible.
This may be a difficult pill to swallow for those of you who, like me, want to make sure every penny is being maximized. But, let’s look a little more closely at my reasoning.
Should I Invest My Savings? – Defining Savings
When I think savings, I think cash. Or, if not cash, something nearly as liquid, like a money market account.
Basically, I want my savings at a bank or credit union. And, I want them in an account that allows me near immediate access to the funds with no penalties. However, I do not want my savings in my checking account where I may be tempted to dip into them impulsively.
Different banks will offer different options for savings accounts. As an example, our bank offers an eSavings account as its most basic option. This is a great option for smaller savings because there are no fees and no minimum account balance requirement. However, the interest rate is on the lower end in comparison to other options.
We personally keep our emergency fund in a High Performance Money Market Account. This is our largest cash fund, and so the balance is high enough to avoid any fees we might incur by dipping below the minimum account balance requirement. This gives us access to the higher interest rates associated with this type of savings account without costing us anything.
Again, that’s just two example from one bank. Every bank is going to offer different savings solutions.
So again, when I think savings, I think cash (or at least something nearly as liquid).
The Purpose Of Savings
We keep this cash in savings accounts because the purpose of savings is typically either to achieve a short term financial goal or to provide some sort of financial security.
Let’s begin with the goals. Say you know you’re going to buy a car sometime within the next year. You’re going to need to start putting aside some money on a regular basis to avoid going into debt for that purchase. Now, it may be tempting to throw that money into some sort of investment every month and “let it grow.” But here’s the issue. While the stock market definitely has a good track record over longer periods of time (5 years, 10 years, etc.), you never know when it’s going to take a short term dive (2020 anyone?). You need to buy a car within one year.
When you know you have a fixed time frame for a purchase, you really can’t afford the risk associated with investment. Hence, this is a savings goal, not an investment goal.
Savings also function as a type of security blanket. The largest and most stable of these types of funds should be your emergency fund. You need this to be available in case of, you guessed it, an emergency. That’s it’s only purpose.
Emergency funds are not supposed to make you wealthy. They’re supposed to protect the money that is.
Should I Invest My Savings? – Defining Investments
If savings are a short term play, investments are a long term play.
When we invest, we’re looking further down the line at a goal in the future that we’re only going to reach through consistently putting money into some type of growth vehicle and allowing compound interest to get to work for us.
When I say “growth vehicle,” I’m thinking single stocks, mutuals funds, ETFs, etc. Outside of getting involved in the stock market, investing may also look like real estate transactions, often through the purchase of investment properties.
The downside to these investments is that your money is exposed to market volatility and risk. There will certainly be ups and downs. But, with some good diversification and enough time in the market, chances are that your money will grow at a much higher rate than the guaranteed rates associated with typical savings accounts.
Essentially, you’re putting money into some type of market and planning on the value of whatever you purchased going up over time.
The Purpose Of Investments
The key words here are “over time.”
Investing aims at achieving a long term goal. Maybe you want to retire at 57. At 59.5, you’ll have access to the funds in your retirement accounts (IRAs, 401ks, 403bs, etc.). But, you need to bridge that gap. So, maybe you set a long term goal of building up enough investments outside of retirement to float you through 2.5 years of not working before you can gain full access to your retirement accounts. This is where investing comes in.
By putting money aside on a regular basis into some type of investment, you can achieve long term financial goals that would not be possible with savings alone.
So, Should I Invest My Savings?
Should I invest my savings? – No.
Keep savings free from risk, and use them for short term goals or security as intended. If you want to put money to work, create separate investment accounts for that purpose.
Conclusion
This is how I approach the question, “Should I invest my savings?” For me, the security of keeping those funds safe from volatility outweighs any reward I might get from exposing them to that risk.
Again, savings and investments serve two different and equally important purposes. Investments are funded by money you’re using to grow your wealth and plan for your future. Savings are funded by money you intend to use in the near future, or are using as a type of protection against emergencies. With this in mind, I believe the best course of action is to keep savings uninvested, and as liquid as possible.
Remember, regardless of your money goals, you can “Bank on a Budget” to get you from where you are to where you want to be!
Should I invest my savings? – No. The security of keeping savings safe from volatility outweighs any reward I might get from exposing them to that risk.
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How do you feel about exposing your emergency fund and short term sinking funds to risk? Do you make that gamble, or play it safe?