It’s no wonder there’s a bit of confusion. Consumers often hear about the importance of “saving for retirement” but when it comes to where you should stash those savings, almost nobody thinks you ought to put much of it in a “savings” account. Rather, while most experts – including us – think you should have both savings and investments, we all generally agree that the bulk of most people’s retirement savings should be invested.
So how do you know which is which?
What is an Investment?
Investing is about building wealth. Simply put, an investment is an asset you buy with the expectation that it will grow significantly in value over time. A person’s collection of invested assets is called an investment portfolio, and may include a variety of stocks and bonds, and stock or bond mutual funds and annuities. Some people also include things like real estate and (for the adventurous) more exotic assets like cryptocurrency.
However, the key factor that makes an investment an investment, and not savings, is that it also has the potential to lose value. Generally, the greater the risk the greater the potential return. (Emphasis on the word “potential” here.) That’s a big reason you should never invest money you expect to need in the short-term to cover daily needs or emergency expenses.
Why a Savings Account Isn’t an Investment.
A savings account, like the ones you open here at USECU, is federally-insured so your money is safe. You will earn dividends (banks call it interest), but since your financial institution provides an up-front rate you can count on, the rate you earn will be less than what you might gain from an investment that involves some level of risk. You just need to verify that the financial institution federally insures your deposits and to what limits based on your account type and ownership (USECU is federally insured).
With the Risks, Why is Investing so Important?
Study after study, over many decades, has shown that investing delivers higher average returns over the long term than simple savings or certificates. But it’s about more than just making more money. It’s also about the “I word” — inflation.
After years of super-low inflation, this past year made a lot more people think about the impact of inflation on retirement planning, since it can be hard to predict what things are going to cost far into the future.
In simple terms, inflation refers to the rising cost of goods and services. It’s sometimes called the enemy of savers, because it diminishes your buying power. Say, you’re super-cautious with your money, so you work hard to build up your savings. But inflation undercuts your efforts and you end up worse off than when you started because inflation means your dollars don’t go as far – and don’t buy as much – as they used to.
Now, when you’re working and you’re getting pay increases to cover rising costs, you may not notice inflation all that much in your day-to-day spending. But it makes a huge difference when you’re projecting into the future, as to how much money you’re going to need to enjoy a secure retirement. And it’s equally impactful on your nest egg – if the money’s just sitting in savings, rather than invested where there’s potential for higher returns, your savings will lose value and buying power.
How to Know When You’re Ready to Invest.
Since almost none of us has more money than we know what to do with, deciding when to begin investing starts with creating a realistic budget and determining priorities.
Once you’ve dialed in your budget and figured where you can squeeze out some money for “future you,” your first priority should be establishing an emergency fund. If you’re just starting out and have minimal costs, you might only need to set aside 3-6 months of basic living expenses. If you have more financial obligations (like a mortgage) or a family to support, you’ll probably feel more comfortable with a 6-12-month cushion. That emergency fund absolutely must be in a savings or similar account that you can quickly and easily access if, for example, you have an unexpected medical expense, car accident or major home repair.
With your emergency fund in place, you should also think about your debt load. If you have major, high-cost credit card debt that’s a big drain on your budget, so it probably makes sense to pay that down before you begin investing. If you’re going to need to buy a new car or other big purchase in the near future, that’s also money that ought to be in savings.
Investments are not NCUA insured, there is no Credit Union Guarantee and they may lose value.
How Much Should You Invest?
Once you’re on fairly solid financial footing, it’s smart to start investing as soon as you possible – that gives more time for your money to grow. If you have a 401K with an employer match, that’s where you should start. Always put aside at least enough to maximize the employer match, or you’re leaving money on the table.
Another smart strategy is to earmark a portion of any raises you get to your investment account. Have the increase automatically invested from the outset and you’ll never miss the money, but your future self will thank you!
Wanna Talk it Over?
If you are convinced on the importance of saving and investing but are looking for more guidance, our financial advisors are here to help. Reach out to schedule a free, no-obligation consultation or portfolio review.
This information and related links are being provided for informational purposes only and as a convenience. Links to external resources do not constitute an endorsement or an approval by USE Credit Union. Must meet membership and account criteria.
While deposits are federally insured at USECU, investments conducted through our financial advisors are not NCUA Insured, have no Credit Union Guarantee and may lose value.