Where do most people find the money to invest in stocks, bonds, mutual funds, and other securities? Two very common investment methods are transferring money that accumulates in a savings account to an investment product and regularly setting aside a portion of one’s income. Indeed, among the most powerful ways that people increase their financial security and grow wealth over time is to develop a “savings habit.”
Media reports and advertisements by financial firms provide lots of advice about how to become financially secure, but the simplest and most basic strategy is to “pay yourself first” and save a portion of your income on a regular basis. In other words, by paying yourself, you treat savings like an important “bill” that has to get paid.
It is more important today than ever that Americans adopt this simple idea. The U.S. savings rate is the lowest it has been since the Great Depression. In addition, household debt levels and foreclosure and bankruptcy filing rates are high and housing values have declined in many areas of the country. All of these factors support the need for savings. In other words, “saving for a rainy day” means starting to save now!
So, why should you save? There are many reasons for saving money:
• Purchase “big ticket” items
• Pay for high cost goals (e.g., house down payment, college education, car purchase)
• Retire comfortably
• For security and peace of mind
• Build an emergency fund
• Accumulate money to invest
Before transferring any funds from savings to investments, set aside three months of expenses in a liquid account (e.g., money market fund or short-term CD) that can easily be accessed in the event of an emergency or unforeseen expenses (e.g., illness, disability, or a car accident). Other investment pre-requisites are adequate health, life, and property insurance and no or low consumer debt payments such as credit card bills. After all, few investments can guarantee the 18% return equivalent to paying off the balance on a credit card with an 18% annual percentage rate (APR). Clearly defined (date and cost) investment goals are another must because they help identify appropriate investments by matching the time frame of a goal with investment characteristics.
Once these preliminary financial tasks are taken care of, consider using some of your accumulated savings to make an investment purchase. For example, you’ll need $1,000 to purchase a Treasury bill, note, or bond and varying amounts (depending upon the investment company) to open a mutual fund account. Once you make an initial mutual fund deposit, subsequent shares can often be purchased for much less. You can even set up an automatic investment plan and have subsequent deposits debited regularly from a checking or savings account. For additional information about investing with small dollar amounts, see Unit 8 of www.investing.rutgers.edu.
The most important thing is to start saving today. If you are already saving money, try increasing the amount that you save. For example, from $50 to $100 per month. The results, over time, will be amazing. For additional information about benefits of saving, visit the America Saves Web site at www.AmericaSaves.org. There, you can enroll as an American Saver at no cost and receive periodic motivational newsletters.
