It’s important to remember the rules of smart money management when deciding where to invest your nest egg. Keeping a good balance of availability, rate of return, and a guarantee of funds can seem difficult for the uninitiated, but it doesn’t have to be hard. Follow these short, simple rules and you’ll feel far more confident in where and how you invest your savings.
First, consider the funds that you will need access to over the next five years. This includes emergency money (e.g., car or roof repair), savings for specific high value purchases (e.g., a new television or house renovation), or any other liquid funds (e.g., money set aside for future bills).
This money needs to be available more than anything else, and so should be kept in an extremely safe place, like a regular savings account. You might get away with trying to get as high an interest rate as possible, but be wary of tying up your money here; this is the portion of your money that needs to be easily liquidated.
Next, consider money that you do not expect to need in the next five years, but which you cannot do without for at least ten years (e.g., money you’ll need if you lose your job or for long term purchases like a new car or house upgrade). If you’re starting retirement or are beginning to get a bit older, the majority of your savings should be in this category.
These are funds that you are okay with tying up for a few years, yet are not okay with taking a loss on. Your local bank or credit union will be able to set you up with a long term certificate of deposit or a United States savings bond that should help you get a fair return on money you won’t need to touch for a few years.
Finally, consider the savings you will not need for the next decade (i.e., money that you could lose without significant financial strain). This is especially important for younger investors, as they can get away with putting a larger proportion of their savings in this category and consequently gain a far larger return.
The savings allocated to long term investments will best be put into mutual funds. For those that aren’t interested in learning all about mutual funds, the best bet is to put everything into an index fund. Index funds are generally the safest of all mutual funds, and are definitely the best for newcomers. Experts might be willing to undergo a bit more risk after doing enough research to see which mutual funds they prefer, but it is strongly recommended that this not be attempted unless you really do your research.
Follow these simple steps and you’ll be well on your way to an intelligent investment strategy. Just be sure to speak with a financial advisor before making any major decisions, and never underestimate how much money you’ll need in the next five years. Click here to read more information.