What It’s Worth

What It’s Worth

Saving Money by Investing in Your Goals

Author: Michelle Parish
Published Date: 9/20/2017

We are all under pressure to save money.  But what if we changed the lens through which we view saving to see it as investing in ourselves and for our future goals—things like a vacation, wedding, house, or life after retirement? 

When you pay yourself first, you are prioritizing your future and your goals.  Not to be confused with spending money on yourself, to pay yourself first means setting aside a portion of your income each month before taking care of other financial obligations.  A lot of people only save what’s left over, and that’s the equivalent of paying yourself last, according to PlainsCapital Bank Chief of Retail Bank Services Matt Adkins.

“It’s the airplane analogy of putting on your oxygen mask before assisting others,” said Adkins.   “You should prioritize paying yourself first so that you are in a better financial position to take care of yourself and potentially others.”

The key to leveraging the most from your savings is to get specific about how and why you’re saving in the first place, what your goals are, how far into the future they are, and what type of financial products can get you there effectively.  For example, money you need in the short term—like for an emergency fund, to purchase a car, or pay for a family vacation—shouldn’t be in the stock market.  Just like money you need for your kids’ college fund or your retirement shouldn’t be in a checking or money market account.  

Before you decide on a savings strategy, consider for what you are investing and with what kind of timeline you are working.  A timeline is an important tool to help you determine how liquid, or accessible, you need your cash to be.  You also need to consider the level of risk you’re willing to take, which can directly impact the level of return you can expect.  In general, less liquidity + more risk = bigger return.  

A monthly budget can help you figure out how much you can afford to set aside each month, and then, based on your goals, you can determine which type of financial products best fit your needs.

Following is an example of savings strategies for short-term and intermediate-to-long-term goals:

Short-term investments – money you need to access within three years

Goals: maintain liquidity, emergency fund, a child’s braces, car purchase, family vacation, etc.

Products: savings account, money market account, short-term CD

Typically defined as money you may need to access immediately or potentially within three years, savings accounts, money market accounts, and short-term certificates of deposit (CDs) are effective short-term investment solutions.  Savings and money market accounts are fully FDIC insured against loss up to the maximum allowable by law, and they provide immediate liquidity options without penalty from withdrawal.  Generally, in today’s rate environment, savings accounts can earn between 0.05% to 1.00% annual percentage yield (APY).  Depending on the level of investment, money market accounts, which function like a hybrid between a checking and a savings account, can earn up to one percent higher interest rates than traditional savings accounts but generally requiring a higher level of deposit.  Whether a savings or money market account fits your need, both are about short-term liquidity, low risk, and lower yield compared to longer-term investment vehicles. 

If you are looking for a short-term investment product that provides a higher rate of return, short-term CDs may fit your need.  With a CD, you commit to leaving your money invested for a set period of time.  A CD is a great solution for money that you may want to designate for a specific purpose or specific time in which it will be used.  Shorter-term CDs can also be a way to build wealth for longer-term investments vehicles, as your saving disciplines begin to build excess liquidity.  CDs are also a low-risk investment vehicle that provide a higher rate of interest return relative to savings or money market accounts, but they do come with a penalty for early withdrawal before maturity.  They are FDIC insured up to the maximum allowable by law and can be a safe investment if you won’t be needing the money for a while.  

Intermediate-to-long-term investments – money you need to access within three to 10 years or longer

Goals: home purchase or renovation, college tuition, retirement

Products: long-term CD, IRA, Coverdell Education Account

Long-term CDs can be a great investment choice when you are looking to build a cash reserve for a specific longer-term goal.  You’ll earn a higher rate of return relative to a short-term CD, just be sure you won’t need the money before the term is up, as penalties for early withdrawal can be significant.  Staggering your CD investments through a combination of shorter term and longer term CDs, a strategy called laddering, and can enable you to have greater liquidity while still investing for long-term goals. 

An IRA is a self-directed retirement-savings account, unlike a 401(k) which is an employer-sponsored retirement savings account.  Comprised of multiple investment options including CDs, stocks and/or bonds, an IRA is intended as a long-term investment savings plan to build money for retirement.[1] If withdrawals or liquidation occur before the age of 59 and a half, penalties may occur.  IRAs exist in two forms, the Roth IRA and the traditional IRA, with annual contribution amounts set by the Internal Revenue Service.  Because of the long-term time horizon and the ability to diversify how the funds are structured, an IRA can potentially weather interest rate or stock market volatility and provide a larger rate of return over the long haul.

Paying for your kids’ education can be expensive.  Committing to a diligent college savings plan can mean success down the road, based on small contributions made over a long period of time.  There are several good education-specific savings plans available including a Coverdell Education Savings Account (CESA).  Formerly known as an education IRA, a CESA is a tax-advantaged investment account set up as a trust to help families pay for qualified education expenses.  CESAs can be comprised of stocks, mutual funds, or CDs and function much like an IRA with similar contribution limits.

To learn more about savings and investment strategies best suited for your financial needs and goals, visit the PlainsCapital Bank website or visit any PlainsCapital branch and speak with a customer service representative.

(1) Non-deposit investment products are not insured by the FDIC; (2) non-deposit investment products are not obligations of, or guaranteed by, the financial institution; and (3) non-deposit investments will subject the purchaser to investment risk, including possible loss of the principal amount invested.

Tags: Personal Banking,Personal Savings