You must have heard the age long advocacy imploring folks to save for the rainy day. As a youngster, you probably laughed your head off if someone close to you thought it wise to give you this piece of advice. Why not laugh out loud?
Laughing out loud was necessary because a straight up answer for the annoying advocate was this: “I’m young, so I don’t need to save for retirement now.” The other time when you felt like reflecting on the matter, The New York Times story played in your head and some vivid sentences flashed before you: “Many adults under 35 are throwing financial caution to the wind. It’s all about saving less, spending more and pursuing passions.” Isn’t spontaneity exciting!
But then, someone nosey tried to make you have a rethink. Alas, you bluttered: “It’s not worth saving if I can only contribute a small amount.” True, it does make sense. Nonetheless, your argument begs the question: “How much do you really need to start saving?”
Different schools of thought recommend having enough savings to cover three to 12 months of expenses. Some people achieve this goal by just stashing cash away in a savings account. That is all well and good if you just like to see so much money sitting in a savings account that barely yields interest.
Alternatively, you can achieve the same goal by saving with a purpose. That is, establishing specific goals and saving towards them. For example, saving for the rainy day could be cash sufficient to cover one month’s worth of expenses in a savings account and assets, such as stocks, that can be easily liquidated in an investment portfolio. There will be sufficient money between the savings account and investment portfolio to cover three to 12 months of expenses. However, the investment portfolio stands to yield better returns on investment than a regular savings account.
Investment portfolio stands to yield better returns on investment than a regular savings account.
Once the above is in place, any other cash savings should be tied to a specific goal; for instance, down payment for a car, a house, or starting a business. The intent is to apply the funds towards something productive that enhances your quality of life. If you suddenly come into a lot of money because of an inheritance or an investment that performed exceptionally well, it is okay to put such money in a certificate of deposit for a period of time while you work on a plan of action for further investment of the funds. During this time, you can consult with experts such as financial planners or investment counselors in order to determine the most effective way to invest such funds.
Savings do not always have to be serious matters, but you can always save towards having fun. In other words, setting funds aside every pay period to take a vacation would certainly prevent out of control debt, which could result from you charging everything to a credit card without an immediate plan on how to pay off the credit card balance. Interest rates are scary.