This question has risen in many minds “What’s best for me, investing or saving money?” The truth is the best way to save money is to diversify between investing and saving. Most people argue that just putting money aside is going to turn into great wealth on its own. Wrong, what people don’t realize is that in this day in age, you are not going to be okay with just saving a few dollars here and there and depositing it into your savings account; you need to diversify your money. Split it up and not only save, but also invest a portion of that savings. The reason why you need both instead of one or the other is neither works best on their own. Asset allocation means “dividing your investment portfolio and investable dollars into different asset classes.
The theory behind asset allocation is that by splitting your investment portfolio into different types of investments, you can reduce the volatility of the value and returns of your portfolio. In other words, asset allocation can help you smooth out your portfolio value and overall return on investment” (Bresnan 9). According to the online dictionary source, American Heritage, the financial term, diversify, “means to give variety to; to spread out investments, especially in business.” Asset allocation, which is formally known as money management, also according to American Heritage, “is to distribute assets according to a plan.” So for your money to work best for you, and have a great return, you need to start with a plan. That is where asset allocation and diversification step in. A prime example of a statistic regarding allocating your assets comes from the book, Asset Dedication, “Asset allocation became the dominant paradigm of investment strategy in the late 1980s. A research paper in a respected academic journal suggested that over 90 percent of the variation in a portfolio’s return could be explained by the way the funds were allocated among the three major asset classes: X percent to stocks, Y percent to bonds, and Z percent to cash” (Huxley 5). This quote is stating that the main reason behind a portfolio’s return is from the diversification of assets between investing and saving.
To begin, Investing is that portion of your money that works for you. It is the portion of your savings that you put aside, usually for the long run, with a view of this money increasing in value based on the products that you choose to place it in. The reason to invest is to reach a greater return on your money than just placing it into a savings account.
Investing includes a broad range of ways to allocate your money effectively. The ways include stocks, bonds, and mutual funds. When you deposit money away to your bank account and the sum doesn’t grow much larger, you start to realize that simply putting aside a portion of your money for savings, is not going to lend a hand in generating wealth. If you are saving, rather than investing, then you are merely retaining the value of your money. This is because of the low interest rate you are receiving; even if the sum of money you are trying to save is large; it will still only generate a small return in a regular savings account. Keep in mind that invested money has a much greater risk or return than a savings account. That is why you should divide your capital into two sections; investing and savings. By doing this you get the best return with the lowest risk, no matter where you decide to allocate it.
The first thing to decide in investing is how to diversify your money. Investing in stocks is a very popular way to go. Take a portion of your money set aside to invest, divide it, and research different companies you would like to invest your money in. It is a good idea to pick at least one Blue Chip stock which is, according to Investopedia.com, a “Stock of a well-established and financially sound company that has demonstrated its ability to pay dividends in both good and bad times.” Like the millionaire Warren Buffet said, plain and simple, “Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.’ Invest in companies you enjoy.”
With investing also comes the option of buying bonds, which are issued by the government corporations. They are, in simplest terms an “I owe you contract” that the issuer is obligated to pay the bondholder the principal, which is the original amount for the loan, plus interest. A bond is a security, but differs from shares of stock and in that stock is, an ownership interest, bonds are simply debt. Therefore a shareholder is an owner, but a bond-holder is a creditor waiting for the contract to be filled. Mutual Funds are another way to invest your money. They can be a short-term or long-term investment component. According to the (U.S Securities and Exchange Commission), “a mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate.”
Along with investing a portion of your money you should be allocating a part of your capital to your savings. When savings is mentioned it is merely a financial word that can be broken down into different savings components such as certificates of deposits; (CDs), individual retire accounts (IRAs), and a simple savings account.
All of these are great to put your money into, starting with CDs, according to Investopedia, “they are savings certificates entitling the bearer to receive interest.” A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the Federal Reserve Insurance Corporation (FDIC). The term of a CD generally ranges from one month to five years.
Next, are IRAs of which there are two kinds. A Roth IRA, and a Traditional IRA; a traditional is unlike a Roth IRA because it is tax deductible. A Roth IRA is an individual retirement savings account that provides tax free growth, but it is not tax deductible which means the money contributed is taxed before it goes in, but is tax free at the time of withdrawal at the age of 59 ½. A traditional IRA is the same type of account but when withdrawn, the lump sum is taxed again.
Lastly, if you just feel like everything is too complicated and you just don’t care, then a regular savings account will do just fine for you. No worries about withdrawal penalties, no waiting until you reach the age of sixty to take your money out, just plain and simple savings account where you manage what you put in and just sit back and watch the pennies grow.
With proper analysis and diversification, over the long run, your investment will have yielded a higher return than the savings account. Don’t forget even long term investments can turn for the worst, they are not always headed in the right direction. That is why you need to split up your money, broaden your horizons, allocate it to the different parts of the business circle. That is the successful way to save money. Simply to maximize the outcome of return, you need to combine your investments with total savings. This is the right way and the best way to save money, and no one can argue otherwise.
To wrap it up, these two asset allocators, investing and saving work best together and not by themselves. Because if you were to just invest your money in stocks, bonds or mutual funds, theirs that potential risk involved with loosing a portion of your money if the market is bad. But with diversification, over individual retirement accounts and stocks and savings accounts that are backed by the Federal Reserve, theirs less to worry about, and that makes for the best and effective way to save money. I like to think of it as not placing all your eggs in one basket. But no matter what, managing your money through investing and saving makes for the best way to save overall.
Author: Mike Caira
