Saving And Investing

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• Saving refers to accumulating money safely — in a bank savings account, certificate of deposit or a money market account — for short-term needs such as upcoming expenses or emergencies. You earn a low, fixed rate of return. Your money is protected and you can access and use it whenever you need it. You should save for short-term objectives.
• Investing refers to buying investments — such as stocks, bonds or mutual funds — that promise higher long-term returns but can decline in value. Your capital is at risk. In return for taking that risk, you receive a greater potential return on your investment. Generally, you should invest for long-term goals.

You should start saving and investing early and regularly. The key is to establish and continue a disciplined savings and investment plan.

Earning Interest

• Simple interest is calculated only on your principal balance, generally for a single period of less than a year, such as 30 or 60 days.
• Compound interest is calculated on the principal, plus all interest previously earned. Interest can be compounded daily, weekly, monthly, quarterly or annually. The more often the interest compounds, the greater your earnings will be.

When you are comparing savings and investment options, ask these questions. Does it earn simple or compound interest? How often is the interest compounded? What is the rate of return? A small increase in the rate of investment return reaps a big increase in your money over time.

Getting Started

Create an emergency fund. An emergency fund should be the equivalent of 3 to 6 months of basic living expenses — enough to manage a crisis without borrowing money.

• The fund should be low risk and liquid which means the money is available whenever you need it.
• An interest-bearing savings or money market account may be ideal.

Save regularly and systematically. By using payroll deductions to make automatic deposits to a bank, credit union or investment account, you can make saving and investing effortless. You may also request your bank or credit union to automatically transfer a specific amount from your checking account to a savings or investment account each month. If you never see it, you will not miss the money automatically deposited to your savings or investment accounts.

Begin investing as soon as you have accumulated enough money. If your employer offers matching dollars for participating in a retirement plan such as a 401(k) or 403(b), begin contributing to it now. Contribute at least up to the amount your employer matches. You will be giving yourself a raise.

Increase savings contributions when you can. For example, when you receive a raise or bonus, consider adding some or all of the additional earnings to your savings goals.

Ask Questions Before You Invest

• Is my primary goal to keep my money safe or grow my investment?
• How much money can I risk losing? Risk-tolerance level depends on several factors.
• Age.
• Current and anticipated income.
• Financial responsibilities. How would possible losses affect my situation?
• How long do I need to invest? Do I have an intermediate or long-term goal?
• What is my purpose for investing? Am I saving for a vacation home, a child’s college education or a comfortable retirement?
• Will I need access to my money or can it remain untouched for a period of time and potentially yield a higher return?
• Are there federal income tax issues I should consider as I invest?

Basic Principles Of Investing

Focusing Your Investment Strategy

Invest for the long term. The more time you give your investment to grow and compound, the more likely you are to reach your financial goals. History shows that patient investors who focus on long-term goals can withstand fluctuations of the stock market.

Use time not timing. If you start early and invest regularly, you will be able to use time to your advantage. Do not try “timing” decisions to buy and sell based on the market fluctuations. No one has accurately predicted the market fluctuations over the long term.

Keep emotions out of your actions. Investors tend to be motivated by emotion based on short-term variables and the latest news. Think and act intellectually, not emotionally. Investing success requires patience, stamina and an unemotional approach. Do your homework; then stay on course.

Increase your knowledge. Learn all you can about investing and specific investments by regularly reading business periodicals and annual reports of companies whose securities you might want to purchase.

Avoid high-risk investments. Avoid futures, commodities and other excessively risky forms of investing — at least until you know all about them and you are willing and able to accept the risk.

Avoid the crowd. If you choose your investments by leaping into whatever is currently doing very well, you may be setting yourself up for recurring losses over time. You could find that the best performing stock, bond or mutual fund in one year becomes one of the worst in subsequent years.

Diversify. Select a wide variety of securities for your portfolio to minimize investment risks. Experts suggest that diversification can reduce the total risk of investing by more than half. Investing in several assets will produce a return based on the average of your various investment returns, rather than relying completely upon the return of one investment.

Evaluate your investment plan. You should evaluate your investment plan annually or at times of significant life events. If necessary, rebalance your portfolio to ensure your mix of investments aligns with your goals, risk tolerance and the time horizon.