So, you have paid off all your bills, and you have built up your rainy-day fund. What is the best way to grow your wealth and manage your personal finances to ensure that your money will be there when you need it? When considering what to do with the money you have saved, it is essential to understand your options. Whether you decide to put your money in your bank account or invest it, you should be aware of your financial situation to choose the best option for you.
How do savings accounts work?
The option of keeping money in your checking account is safe because it will always remain at least at the same balance (unless you withdraw it). You can also earn a small amount of interest by putting your money into a savings account. However, since interest rates are really low now (around 0.07%), you most likely will be losing over time due to inflation. This means that all prices are increasing, so even with a small amount of growth, you will eventually get less value for the same amount of money. So how does investing differ…?
Why should I invest my money?
Due to the low interest rates, if you are looking to grow your money over time by keeping it safe in your savings account, you cannot compete with other investment options. This is where investing in financial markets can provide better growth opportunities. While prices are constantly changing, on average, you can still expect to earn more with investing than just keeping it in the bank. The universe of investments offers various opportunities such as stocks, bonds, commodities, futures, mutual funds and even precious metals. The number of options can be overwhelming. Without sound financial knowledge, it is tough to make an educated decision without feeling like you are taking an uncertain risk. People with considerable wealth usually trust private bankers and investment companies to do this work for them, but what can the rest of us do to make the most out of our money?
Diversity is key
One important thing to consider is to split your money across numerous different investments. Even if you only invest in stocks, you should have several of them. This ensures that you don’t put all of your eggs in one basket, so if one of the investments doesn’t go as you expected, it doesn’t mean your entire portfolio. In general, if you want to make sure your money is in the right investments, you would also need to do research. You will have to check if you think the investment is worth it, see if you like what the company is doing and if you think it is likely to grow further in the future. This requires a lot of time if you want to do it right. If you still would rather rely on professionals to select where to invest your money, there are several affordable options called digital investment platforms or robo-advisors. They choose a number of investments, which usually include stocks and bonds and all you need to do is check once in a while how your investments are performing.
Assess your risk level
While investing can be an excellent opportunity to grow your wealth over time, it is crucial to understand that taking risk is part of the process. You can be almost certain that the $10,000 you put in your savings account today will not go below $10,000. The same cannot be said for investing, as your investments’ value will fluctuate over time. That being said, stock prices have steadily increased over time. In the past 30 years, U.S. stocks returned an average of 10.4% on an annualized basis. This means that if you would have invested $10,000 in the US stock market 30 years ago, it would now be worth over $194,000. Investing for the long term has many perks.
Keep your eyes on the prize
Finally, when deciding where to keep your money, you should also consider your time horizon (the time you hold your investments for). It is worth keeping a small amount in your bank account for emergencies (a rainy-day fund) and only invest what you won’t need in the next few months. It will become clear what your short, medium, and long-term needs are when you set your budget and financial goals.
If you are curious about digital investment platforms, check out FLIT Invest and learn more!
Footnote 1: Content is for informational and educational purposes only. Any views, strategies or products discussed may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. The information contained herein should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing.
Footnote 2: FLIT Invest does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
