In this article I’m going to share with you how saving money (putting your money into a savings account) is investing and how you can begin to act like an investor with your savings.
Saving Money Is Investing
I was visiting the MBN forums a few days ago and I ran across an interesting concept. Some fellow bloggers were discussing saving vs. investing and how comfortable we each feel in sharing “advice” on both of those subjects on our blogs.
I’m definitely more comfortable discussing the former (now here I am trying to do an investment piece).
Then someone clever chimed in with “saving money IS investing.” When you save you are investing in the US dollar. I guess that’s right. Although you rarely think of it that way. So, even if you only have a savings account and no true equity account (i.e. stocks, mutual funds) YOU ARE AN INVESTOR.
How To Act Like An Investor
Now that we’ve established that YOU, the saver, are also an investor, let’s examine how you should act as an investor with your savings. I’ve listed 5 things that investors do that you should possibly be doing with your savings:
1. Have an Objective – While there’s nothing wrong with savings money without a reason, I’ve found that it’s easier to stay motivated to save if you have a objective or goal for your savings. So make sure you know WHAT you’re saving for. Need ideas? A few good goals for your short-term savings are: money to be used in an emergency (or a rainy day); money that you need for a future big purchase (like a car or vacation); money to be used to pay future debts (like property taxes). Once you know your purpose, it’s easy to put an exact dollar amount and time frame for your goal. Make sure you include those when defining your objective.
2. Know Your Risk Tolerance – Part of being able to invest properly is a good knowledge of one’s own risk tolerance. How comfortable are you with risking your savings for a bigger return? Take the risk tolerance quiz. To be honest, there’s not much risk to be found in short-term savings. Short-term cash savings is on the low end of the investment spectrum when it comes to risk, so you won’t need much tolerance to be comfortable with most savings options. However, I know some people still keep money under the mattress or in their checking account only. So they’re either very risk averse or they are stupid.
What’s my point? Just make sure the institution you use for your savings is covered under the Federal Deposit Insurance Corporation (FDIC). Federal deposit insurance protects the first $100,000 of deposits that are payable in the United States.
3. Proper Allocation – In investing terms, allocation is referring to as spreading your money across different asset classes. Well, cash is one of the major asset classes, so you need to look within this category to the sub-classes of bank savings, money market accounts, certificates of deposits, actual gold, and yes, literally under the mattress. To be properly allocated you’d want your savings to be spread out across these types of cash assets. What I learned from this is that I actually might want to put some money in my home (not under the mattress, but in our safe). Maybe a couple of hundred?
4. Get Solid Returns – Make your savings work for you. You should be earning at a minimum 3% on your cash savings (at the date of this article June 2008). Not getting that from your bank? Visit this listing of FDIC insured high-yield savings and checking accounts for find a nice place to get solid returns. Some CDs might be able to get you more of a return. Shop around and get the best deal. Just make sure you’re not chasing teaser rates.
5. Track Your Investments – Just like the wise equity investor who watches the stock ticker, you should periodically monitor your savings balance and rate to ensure: you’re still meeting your objectives, properly allocated, and getting the solid returns you’re looking for. I wouldn’t obsess over it everyday, but once a month you should take a peek and see how you’re doing. Good luck.
Got any other ways to act like an investor with your short-term savings? List them in the comments below.