Saving is about keeping some of your money for a rainy day, whereas investing implies taking some risk for a better return. You want to balance these two (capital “preservation” and “growth” in industry speak.)
Unless money is invested at a decent rate of return, it will actually lose value over time because of inflation. When prices rise your dollar can’t buy as much so it’s effectively worth less—what people mean when they say things like “when a dollar was a dollar”.
Millennials are saving, but not investing for retirement according to 2012 research by PNC Financial Services. Only 13% are eying retirement although all of the 2,000 respondents said they save regularly.
- Money not invested is losing value—the dollar lost 23% in the decade ended 2009
- Investing means balancing risk and return (Ed. Note: link to that site heading.)
The ABCs of Saving/Investing
- Don’t even try to save/invest until you clear high-interest credit card balances
- Establish an emergency fund
- Start investing longer term
A. You’ll never find a safe investment that gives you interest rates ranging to 30% as some credit cards charge. So pay them off and meanwhile transfer them to a lower rate, but beware balance transfer fees.
B. Two or three months’ living expenses used to be considered enough. In these recessionary times, some experts suggest at least eight months worth.
C. We’ll cover the absolute basics here. See more at the resources below and the “Future Goals,” “Time Value of Money” and “Risk & Return” sections of the site. (Ed. Note: link to those headings.)
Safe-Money Savings; Cash and its Equivalents:
- Government-insured accounts:
savings/checking/money market-accounts/certificates of deposit (CDs) up to $250k combined, covered by FDIC insurance at banks or the equivalent in credit unions.
- Government bonds:
Treasuries, Savings Bonds, etc.
Investments; The Two Basic, Intangible Types:*
- Bonds, other than government bonds
*There are many other purely financial investments and many physical things you can invest in, from cheese to gold. The most popular, buying a home, is strongly tied to building wealth, not least because of the tax breaks. These are outside our scope, but some may be found on WCSU’s financial literacy microsite.
What Are Stocks, Bonds?
A stock is a share in a company. If it grows you share in the growth by owning a piece of a bigger pie (the share price becomes more than you paid). Annual payments (aka dividends) are also possible.
A bond is you making a loan to a government or company and getting interest for doing so. Getting deeper than we’ll go, there can be other considerations to do with price (face value) of the bond and its effect on your taxes.
Having Both Stocks and Bonds is Playing Safe
- When one does badly, the other does well, so having both types of investment is a way to offset, or hedge, your risks.
- The right mix? 100 minus your age: put that much into stocks, says an old rule of thumb.
How to—Simply—Invest in Stocks
- Buy through a mutual fund, a company that pools many companies’ shares—much safer than you trying to bet on an individual company. (It’s another way to “diversify,” in industry speak.)
- Buy an “index fund”—one that tracks an index, like the S&P 500, typically outperforms other mutual funds
- Pick funds rated four or five stars, for low risk, by morningstar.com
- Pick one with “no load” (starting fee)
- Pick one with an “expense ratio” less than 1.5%, ideally 1%. Paying more to the fund managers rarely produces better investments
- Fidelity and Vanguard are two firms known to be good and inexpensive
- If you don’t have $2,000-$3,000 to put in at once, as most mutual funds require, invest for as little as $50 a month through mfea.com
How to—Simply—Invest in Bonds
- Focus on Treasuries, issued by the federal government (ignoring “munis” and corporate bonds—though, if you have mutual funds, some can be bond funds)
- These, you can buy without using a broker and paying commission, at TreasuryDirect.gov
- TIPS? Money celeb Suze Orman says 2012 is the time to buy Treasury Inflation-Protected Securities because inflation’s a-coming.
“The Little Book of Common Sense Investing,” by John C. Bogle
Strange But True: When researchers had dogs “select” stocks by placing their paws on the newspaper stocks page the dogs’ investment picks did as well as humans’, according to a 2005 documentary by Britain’s Channel Four. Are you sure you need a money manager? (Ed. Note: I saw this show but can’t find a link. Feel free to cut.)
5 Red Flags, Get Rich Schemes
Maybe you’ve already heard from a deposed African king who would be very grateful to you if you would just let him park his millions in your bank account while he resettles in another country? Grateful to the tune of thousands, if not millions of dollars.
Royalty, clergy, and people with bad spelling predominate in phishing emails. The stories vary, but the common theme is that it’s too good to be true.
So why do people fall for them? Sometimes it’s desperation or—to cite another cliché, “you can’t fool an honest man”–greed.
Intelligent, respectable people can be blind to common sense, such as a Massachusetts psychotherapist and minister profiled by the New Yorker magazine.
Phishing, ponzi schemes: they’re among many scams that have been in the news lately.
Keep your eyes peeled for the following:
- Exceptionally high returns (peers couldn’t figure out how Bernie Madoff was getting 20% returns year after year)
- Pay Day loans (interest can approach 1,000%. Three zeros intended.)
- Check Cashing places
- Pawn shops
- RALs (tax Refund Anticipation Loans)
- Credit “Repair” Counselors (if they’re not accredited (Ed. Note. Link to “Need Help Getting Out of Credit Card Debt?” under S1, topic 6, “Debit And Credit Cards”) some are worse than ambulance-chasing attorneys)
- Private Colleges (Some have been investigated for sharp, financial practice)
- Private Student Loans (see government warning)
- Commission-Based Selling “Opportunities” (everyone would be doing it if they made the income projected)
- Pyramid Sales “Opportunities” (as above)
- Work-From-Home “Opportunities” (advertized vs. telecommuting for your employer)
- Pay-Later “Opportunities” (financing means pay a lot more later)
- Car Leasing (as above)
- Warranties (most are very expensive relative to the cost of the device)
- Prepaid “Credit” Cards (Ed. Note: link to ref. w/in S1, T.6, “Debit and Credit Cards”)
- Secured “Credit” Cards (Ed. Note: link to ref. w/in S1, T.6, “Debit and Credit Cards”)
- ID Theft “Protection” programs (an unnecessary monthly charge)
- Credit “Protection” programs (as above) (Ed. Note: link previous two topics to S1, T.5, “How Do You Score?”)
- Time Shares