Anes Weblog  -

A Basic Savings and Investing Strategy

24 08 05 20 18

-------- To Cover Most Needs In Life

Note:  In this article you will find a good Savings and Investment Strategy and suggested investment vehicles for the beginning investor.  ( Low minimum initial investment accounts at the end of article. )

Most people agree that they need to save and invest more.  However, most people find these three challenges (in that order):

1. Priorities: Saving and Investing need to be perceived as a higher priority.  There are many needs and wants competing for the money in your pocket. 
   
2. Cash: Investment cash has to be made available.  My advice:  dissapear it from the pocket.  Make some cash unavailable for your needs and wants, and make it available for saving and investing.  Automatic investment plans are a great choice.
   
3. Organization: An easy to use savings / investment strategy and investment vehicle(s) have to be available and identified. (This is what you will find in this article)
   

I believe a basic Savings and Investment Plan should follow the Pay Yourself First Principle and follow the 10+/10/10 Strategy:

• Retirement: Make sure your silver and golden years are taken care of first: you do not want to work until your last day of your life.  10% of pre-tax income or more goes into IRAs, 401ks or other retirement vehicles.  Maximize them whenever possible, as the sooner you fund them, the longer they have to grow, tax sheltered.  Related articles in this blog:  Lame Excuses for Not Contributing to 401k.
  
• Long Term: Those goals you can feel proud of.  Save and Invest 10% in taxable accounts for goals like purchasing a house, higher education (yours, spouse, or child), finantial freedom, or early retirement.  Examples of accounts and vehicles suitable to start on this: CDs, Treasury Direct US Bonds, Vanguard 500 Mutual Fund.  You can certainly invest more than 10% of your pre-tax income if you want to, but priority should be given to the Reitrement fund until you can be sure that part of your investment strategy is Ready for Retirement (see calculator), Investment Suggestions: If I where an EMC Employee, It isn't how much you make, but how much you keep.
  
• Short Term and Emergency: This is the fun part.  This is where you will feel rich now (or close to now), and this is what will bring you peace of mind at  night.  Save 10% in liquid accounts for emergencies, vacations, computers, cars, and other expenses that people ussually charge up into credit. Buy them cash for a change (or buy them with low interest credit, but have the cash ready in the bank when the low or no interest plan expires).  Always keep a stash of cash in these account(s) as an emergency fund (one to six months of living expenses - not salary), but anything above that mark is fun money.  Of course, over time you will learn to let it grow to use it for more satisfying goals (that trip you always dreamed about vs. a bunch of trinkets every week).  I do suggest you start with a savings account or a money market account for this part of the investments.  A CD or Bond ladder would also be a good option as you fund it better.
  
• Discipline:  Do the three items at the same time.  Getting into a habit takes time, but once you are into it, you will continue doing it easily:  breaking habits is hard.  Avoid debt in the process as well -- that is why you are saving for your short term goals, so that you do not have to charge them up!  If you have not eliminated your credit card debt yet, you may want to work on that fast.  Debt reduction and avoidance is part of a healthy savings and investing strategy.
  

You want to keep the three goals sepparated:  the Retirement Money goes into 401k/IRA, the Long Term money goes into the SP 500 Index Fund or a CD, and the Short Term and Emergency money goes into the money market, for example.  Keeping it sepparate puts your finantial life into perspective.  Most importantly, it helps you make sure the money is spent only on the goals for which it was designed for.

Some people believe this is a lot of money to save.  In reality it isn't.  The Short Term money is money you spend regularly, but instead of paying it after you buy, you will have the money ready at the time you buy.  The money that goes into Retirment accounts is most probably sheltered in some way from income taxes, so the impact into your pocket money is reduced.  However, I do understand it is a significant change in the finantial behavoir for some people.

I have scouted the market for investment vehicles for people that are just starting.  They have two conditions: low volatility, and easy to manage (set and forget).  I made sure that on every category there where options that required very low minimum investments, so that you could start your Savings and Investment Strategy right away.

Suggested vehicles for Retirement money:

• A Roth or Traditional Brokerage IRA:  Fidelity Simple IRA: Minimum investment is $200 a month, and doesn't charges any fees other than the associated with the underlying funds.
  
• A Mutual Fund IRA:  Vanguard 500 Index: A Stock Index that matches the US Equity Markets is a good idea.   Over the long term they tend to have a performance of around 11% anualized.  The ups and downs will be minimized as the investment objective is long term.  ($10 anual low balance fee, 0.20% management fees, included.  No load fund.$1,000 minimum investment.  +1-877-662-7447).  If you do not have the minimum initial investment, you can also open a T. Rowe Price Equity Index 500 with $50 a month for an IRA.  See below for the details.
  

Suggested vehicles for Long Term money:

• An Index Fund: T. Rowe Price Equity Index 500: Similar to the Vanguard SP 500, but with a very low minimum initial investment.  Just set up automatic deposits of $50 USD or more from a checking or savings account, and watch the wealth build.  ($10 anual low balance fee, 0.50% management fees, included.  No load fund. +1-800-225-5132)
  
• A Bank Certificate of Deposit (CD): ING Direct for example - With maturity terms of 1 to 5 years, it offers a slightly better rate than the inflation and taxes.  This type of investment tries to preserve capital first and keep growth as a secondary objective.  ING Direct currently offers rates in the mid 4's%, and has no minimum balance to start investing.
• A US Treasury Bond: from Treasury Direct for example - Public debt instruments guaranteed by the good faith of the US Goverment.  Safer than CDs, and ussually with slightly higher yields.  You can buy them direct from the government with a minimum investment of $1000.  Great for parking cash in a safe way that ussually stays ahead of inflation and taxes.
  

Suggested vehicles for Short Term and Emergency money:

• A regular bank Savings or Money Market Account:  ING Direct for example.  - They do provide an interest that ussually overcomes the inflation and interest income taxes.  It is just a way of preserving the capital.  ING Direct currently offers 3.3% on their savings account, no fees, no minimum balances.  Emigrant Direct Savings Bank offers a no minimum, no fee savings account that currently yields 3.5%.
  
• A Certificate of Deposit Ladder: ING Direct for example. - Same as the ones described for Long Term savings, but I would keep them in the order of 1 year maximum.  You can build a Ladder where each CD matures one month appart.  GMAC Bank is also a good option, as it currently offers 3 mo. CDs yielding 3.5% and 6 mo. CDs yielding 4% with a minimum investment of $500.  Banks like that make CD Laddering easy:  open three or six CDs that mature one month appart and you always have cash ready if it is needed.
• A US Treasury Bill (Bond) Ladder: Treasury Direct - These are public debt instruments.  Guaranteed by the government just as a Bond is.  The term is 3 or 6 months (13 or 26 weeks).  The minimum investment is $1000.  If you get to the point where you want to save, lets say 4 months of living expenses, you can have three 13 week US Treasury Bills maturing at 1 month intervals apart with one month of living expenses each, and one month of living expenses on a savings account.   At this time, US Treasury Bills are paying an interest of 3.5 / 3.8%, slightly better than Savings Accounts at ING Direct.
  

Third Party Content