Invest or Save?

06May08

What a dilemma it is to have money lying around eh? A friend of mine came to me and asked me what he should do with all of this money he has sitting in a bank account at Wells Fargo. I told him to invest. Those of us in our twenties are at a point where we can afford to invest in the stock market and withstand a couple of loss years (when we are in a recession). In fact, we would probably benefit the most by investing during tough times when prices are rock bottom, only to rise in the standard economic business cycle.

When Should I Save?

  • If you are getting married, save for the rock, the reception, etc.
  • If you plan to buy a house, save for a down payment – at least 20% of the value of the home
  • If you don’t have an emergency fund, do it now. You never know when something will happen.

Why Should I Invest?

High yield savings, money markets and CD’s are safe, and can offer you decent rates between 3%-5% (at the time of this writing), but there should be no excuse for returning at least 8%. Why 8%? The S&P500 has historically returned 8% over a ten year period. By simply investing in a fund that tracks it like the Vanguard S&P500 Index you can receive the bare minimum return in the stock market. If you diversify a bit more, and throw in some international funds, you increase your risk, but you may also increase your return. You could be looking at a 15% return rate in a single year. Not too shabby.

How Should I Invest A Lump Sum?

Lets say you’ve got $10,000 sitting in a bank account and you are ready to put it into the stock market. First and foremost, figure out your asset allocation. For simplicities sake, let’s assume you want to invest in 100% stocks because you are young.

  • Make the minimum contribution to start a mutual fund – usually around $1,000-$3,000 for most funds.
  • Dollar cost average by contributing to the fund every month. That means, if you have $7,000 left after opening the mutual fund, contribute $583.00 every month. This will minimize your risk. On certain months you may buy shares at a low price, other months it could be high – you never know because the stock market is unpredictable and volatile.
  • Dollar cost averaging is easy. Setup an automatic contribution with your mutual fund company or brokerage. Just a word of caution, most brokerage’s charge a transaction fee for mutual funds. It’s best to sign up for an account with the mutual fund company itself.

Use Your Investments As Savings

If you ever need money to give you that added boast to your savings, you have the freedom of doing so by selling some of your investments. Obviously don’t mess with your retirement money. I’m speaking on behalf of a non-retirement account.

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2 Responses to “Invest or Save?”

  1. my answer would be save to invest, because saving cannot beat inflation but investment can.

  2. Hi,
    The information about the investments is great. I got ample amount of information about how to invest and where to invest. Thank you for the wonderful information about investment.


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