In previous weeks we talked about the various ways to diversify your money among stocks and bonds. A third component of spreading your money is CASH. It is important to keep a percentage of cash on hand for various reasons:
- safety - the value stays reasonably consistent,
- liquidity - it's available with no hassle when you need it,
- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,
- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.
Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:
- plain old-fashioned bank savings account (FDIC insured),
- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,
- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,
- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.
Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.
Showing posts with label savings account. Show all posts
Showing posts with label savings account. Show all posts
Tuesday, April 14, 2015
Saturday, November 1, 2014
Risk Tolerance
Risk - the permanent loss of capital (money).
Over the past few weeks we have experienced much volatility in U.S. stock markets.
Volatility is the gyrations of stock prices in reaction to social and economic conditions. With the market moving up and down - making money and losing money - how do you protect your money and your future?
How much money can you bear to lose? NONE - most would say.
If we ask the question slightly differently - how much money must you keep absolutely safe to allow you to sleep at night? Your answer may show how much risk you are willing to take. Some may say 100% - then you would be considered risk adverse.
Others may say 20%; they would be considered to have a low risk tolerance.
But none of us likes to lose money. So how do I know where to put my money?
Money needed soon (1-2 yrs.) for a definite goal - a house down payment, a new car, an upcoming vacation - all must remain safe with little or no risk. The safe places to keep this money are:
savings accounts,
CD's (certificates of deposit at a bank)
most money markets.
You have NO risk tolerance for this money.
Money slated for mid-term goals (3-8 yrs.) - an Alaskan cruise in 5 years, college tuition for your ten-year old, a vacation house in 4 years - may earn slightly more interest if invested in short-term bond funds or certain high quality (blue chip) stocks.
You have small risk tolerance for these goals.
Money designated for retirement - 15, 20, 30 years away need greater exposure to risk to provide the growth necessary to build a sufficient nest egg. Here is where investing in stocks and bonds gives you growth opportunity but also increases loss possibility.
You have moderate risk tolerance for long term goals.
Extra money, over and above all your savings, may be allocated to higher risk.
This is not the rent or mortgage money. This is money you can afford to lose.
Real estate, commodities (e.g.metals, oil, coffee, grains) fluctuate wildly(high volatility)
You have high risk for these investments.
Be $ Smart - know your risk tolerance. Invest wisely so you may sleep well.
Over the past few weeks we have experienced much volatility in U.S. stock markets.
Volatility is the gyrations of stock prices in reaction to social and economic conditions. With the market moving up and down - making money and losing money - how do you protect your money and your future?
How much money can you bear to lose? NONE - most would say.
If we ask the question slightly differently - how much money must you keep absolutely safe to allow you to sleep at night? Your answer may show how much risk you are willing to take. Some may say 100% - then you would be considered risk adverse.
Others may say 20%; they would be considered to have a low risk tolerance.
But none of us likes to lose money. So how do I know where to put my money?
Money needed soon (1-2 yrs.) for a definite goal - a house down payment, a new car, an upcoming vacation - all must remain safe with little or no risk. The safe places to keep this money are:
savings accounts,
CD's (certificates of deposit at a bank)
most money markets.
You have NO risk tolerance for this money.
Money slated for mid-term goals (3-8 yrs.) - an Alaskan cruise in 5 years, college tuition for your ten-year old, a vacation house in 4 years - may earn slightly more interest if invested in short-term bond funds or certain high quality (blue chip) stocks.
You have small risk tolerance for these goals.
Money designated for retirement - 15, 20, 30 years away need greater exposure to risk to provide the growth necessary to build a sufficient nest egg. Here is where investing in stocks and bonds gives you growth opportunity but also increases loss possibility.
You have moderate risk tolerance for long term goals.
Extra money, over and above all your savings, may be allocated to higher risk.
This is not the rent or mortgage money. This is money you can afford to lose.
Real estate, commodities (e.g.metals, oil, coffee, grains) fluctuate wildly(high volatility)
You have high risk for these investments.
Be $ Smart - know your risk tolerance. Invest wisely so you may sleep well.
Friday, September 12, 2014
Dual Purpose - Roth IRA
Saving for retirement can be tough while you are trying to build an emergency fund, pay off student loans, car loans and other expenses. But we all know the importance of saving early. The earlier you start saving for retirement, the faster your money will compound and grow.
Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)
Aim for three months emergency fund in a savings account and three months in your Roth.
How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?
Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.
Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.
Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.
Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.
Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)
Aim for three months emergency fund in a savings account and three months in your Roth.
How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?
Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.
Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.
Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.
Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.
Subscribe to:
Posts (Atom)