Saving And Investing

---

• Saving is accumulating money safely — in a bank savings account, certificate of deposit (CD) or a money market account — generally for short-term needs such as upcoming expenses or emergencies. Typically, money placed in such accounts earns a lower, fixed rate of return. Your money is protected and can be withdrawn or accessed with relative ease. Although for CDs, penalties may apply for early withdrawal.
  
  
• Investing requires that you take a risk with your money by buying securities, such as stocks, bonds or mutual funds, with the hope of earning higher, long-term returns. Investments generally do not offer the safety that a savings account does; so your capital is at risk. In return for taking that risk, you have the potential for a more rewarding gain on your investment.
  
  

Earning Interest

• Simple interest is calculated only on the 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 interest compounds, the greater your earnings.
  
  

When comparing savings options, ask these questions.

• Does it earn simple or compound interest?
• How often does the interest compound?
• What is the rate of return?
• What is the risk?

A small increase in the rate of return reaps a big increase in your money over time.

Pay Yourself First

• Automatically transfer a portion of your pay to a savings account as soon as it is deposited. That way, you will not miss the money.
  
  
• Save and invest at least 10 percent to 15 percent of your net income. If you cannot afford this amount, save as much as you can. The key is to begin saving and investing now.
  
  
• Create an emergency fund 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, so the money is available whenever you need it.
  
  
• An interest-bearing savings or money market account may be ideal.
  
  
• Increase savings contributions when you can. For example, when you receive pay and longevity increases, federal income tax refunds, gift money and rebates, consider putting some or all of this additional money toward your savings goals.

Ask Questions Before You Invest

• What is my primary investment goal? To keep my money safe or grow my investment?
  
  
• What is my risk tolerance? How much money can I risk losing? Risk-tolerance level depends on several factors.
  
  
• Age.
  
  
• Current and anticipated income.
  
  
• Financial responsibilities. How would possible loss affect my situation?
  
  
• Is my goal intermediate-term or long-term?
  
  
• Will I need access to my money or can it remain untouched and potentially yield a higher return?
  
  
• What federal income tax issues should I consider when investing?

Focusing Your Investment Strategy

Invest regularly. Invest a set amount of money on a regular basis whether investment markets are moving up or down — a strategy known as dollar cost averaging. When prices are high, your regular contributions buy fewer shares (units of ownership in a company or mutual fund); when they are low, your contributions buy more. This approach tends to spread investment risk over time. Keep in mind that dollar cost averaging does not ensure a profit or protect against loss in a declining market. You should also consider your ability to invest continuously through periods when the market is down.

Invest for the long-term. Give investments plenty of time to potentially grow and compound. Patient investors who focus on long-term goals can generally withstand stock market fluctuations

Use time not timing. Start investing early to give your money time to potentially grow. Do not try “timing” decisions to buy and sell based on the market fluctuations. No one has accurately predicted market fluctuations over the long term.

Keep emotions out of your decisions. Think and act intellectually. Do not let short-term variables or the latest news guide your investment decisions. Do not allow emotions to influence your financial decisions. Success requires patience and a steady approach. Do your homework; then stay on course.

Increase your knowledge. Read business periodicals and annual reports of companies whose securities you might want to purchase. Visit United States Financial Literacy and Education Commission at www.mymoney.gov/saving.shtml for links to more information on saving and investing.

Avoid high-risk investments. Avoid futures, commodities and other excessively risky investing — at least until you thoroughly understand how they work and you are able to accept the risk.

Avoid the crowd. Choosing investments by leaping into whatever is currently popular often leads to recurring losses over time. Today’s best performing stock or mutual fund may become one of the worst performers in subsequent years.

Diversify. Avoid keeping all your money in one investment or asset class. Diversify by selecting a variety of securities for your portfolio that do not react to market fluctuations the same way — an approach that can potentially reduce your overall risk. (Your returns and risks should equal the average results of all investments, rather than reflecting the performance of just one.)

Review your plan. Evaluate your investment plan at least once each year and every time you experience a major life change, such as college graduation, marriage, birth or adoption of a child or purchase of a home. If necessary, adjust your investments to make sure they match your goals, risk tolerance and time horizon.

Basic Principles Of Investing