Saving & Investing–The Yin & Yang of Your Financial Plan

Savings – your Yang – are your rainy day and emergency funds and your funds for discretionary spending. You’ve heard it before, set aside anywhere from three to 12 months of salary just in case you need it. Things like the loss of a job or caring for a sick parent or child can occur without warning and it’s important to have a safety net to cover the loss of income. Savings are typically very liquid meaning you can access the money very easily without incurring penalties. This makes them good vehicles for luxuries and discretionary items – vacations, shiny new bicycles, and those shoes you’ve been eyeing.

Examples of savings accounts include interest-bearing checking accounts, passbook savings accounts, and certificates of deposits. They offer little risk and little reward. Savings accounts don’t pay much in the way of interest rates and over the long-term don’t typically beat the rate of inflation. Accounts like money markets earn more in interest, but may limit the number of transactions you can make or require you to maintain a minimum balance. Certificates of deposits or short-term Treasury bills lock up your money for a short period of time, but offer slightly higher interest rates.

Investments – your Yin – are used for longer-term goals like purchasing a home, sending a child to college and money to live on in retirement. In a nutshell, investments are products you purchase that you expect will return income or make a profit over time. Costs associated with buying and selling investments make liquidity unattractive in the short-term. Investments are your set it and forget it funds.

While investments typically offer higher rates of return than savings, they come with higher risk. In general, the more time you have to accrue wealth from your investments, the greater the returns, but you need to be able to wait. Over the long-term, the ups and downs of market volatility should smooth out. Investment examples include stocks, bonds, mutual funds and real estate and can be found in vehicles such as 401k plans, brokerage accounts and IRAs.

So what’s the bottom line? Save for now and invest for later for a balanced financial life.