Your Financial Wellness
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|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
Let Your Goals Determine the Right Savings Plan for You
When setting up a savings plan, the challenge for most people is determining which savings product to choose. If you’re saving simply for the sake of saving, then it’s hard to go wrong choosing any savings vehicle. But, if you are truly trying to optimize your savings dollars, you would be better off matching your savings goals to the right savings product. Having a clearly defined goal, with a specific timeline and target amount, also provides the motivation to maximize your savings contributions.
Most people, especially when they are younger, have more than one thing they need to accomplish, such as establishing an emergency fund, saving for a vacation, accumulating a down payment, saving for a college education, etc. Depending on your cash flow situation, it may not be possible to accomplish all of them, which is why it is so important to prioritize your goals and start with first-things-first. Then as your income and excess cash flow increases, you can begin to allocate savings to other goals.
A mistake many people make is to simply lump all of their savings into one plan. Doing so makes it difficult to measure your progress towards different goals. Plus, shorter term goals require a different savings approach than longer term goals. A better approach would be to set up separate savings plans for each goal. That way, you can select the type of savings vehicle to meet that particular need. With online banking and savings, it’s easy to set up and track more than one savings account. And, as your priorities change, you can easily manage your accounts to obtain the best savings allocations for your current circumstances.
Set Your Savings Targets
Before combing through all of the bank brochures and ads promoting money market accounts and CDs, set your savings targets and prioritize them. Start saving for your most immediate and important goals first, and as your savings budget allows you can initiate a savings plans for your other priorities. Here’s how a prioritized savings plan might look:
Establish an Emergency Fund
This should be the first priority for everyone – to have enough funds set aside to cover living expenses for a 12 month period in the event of a short term interruption of your income. You should only use liquid and safe savings accounts for this purpose. The yield on these accounts is minimal right now, but the point is to ensure that the money is always available when you need it. Money market accounts may offer slightly higher yields, but they are not usually insured by the FDIC. They also may require a higher minimum deposit.
Accumulate a Down Payment
If you have set your sights on buying a home, say, five to ten years out, you can consider longer term savings vehicles that offer higher rates of return. Certificates of Deposit are offered in maturities of one to ten years, with the longer the maturities offering higher yields. CDs also require larger deposits, so you may have to start out accumulating funds in a savings account or money market account and then transfer lump sums as they become available.
Saving for College
Longer term goals, such as a college education, could allow you to try for higher yields using longer term vehicles or taking some risk with a mix of investment vehicles. Either way, you should take advantage of tax-favored savings plans, such as 529 College Savings Plans or Coverdale Education Plans, which allow you to accumulate and apply funds tax free for qualified college expenses. Here you can opt for long term CDs or a conservative investment allocation in mutual funds. As your time horizon grows shorter, you can shift your funds into fixed, guaranteed accounts such as money markets or savings.
Saving for Retirement
Next to your emergency fund, your retirement savings should be your top priority. It’s never too early to start saving for retirement, and, the earlier you start, the less risk you need to take to reach your goal. Long term CDs are appropriate for IRAs, and your 401(k) probably has a fixed, guaranteed account. With a longer term horizon, you should consider a mix of guaranteed vehicles with some offering the potential for higher returns. TIPS (Treasury Inflation Protection Securities) provide a fixed yield that is linked to inflation. Beyond that, it may be important to diversify into some investments that can generate higher returns, such as equity income funds, or a Blue Chip stock fund. Over time, these funds will produce returns higher than those in savings accounts. If you are properly diversified, your risk will be reduced.
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