The month Johnny and I paid off our student loans was just like any other month. But the next month? It was unlike any other. For the first time in our marriage, we could focus on saving, instead of paying off debt. Saving! Just what we’d always wanted. But after several months of saving, we started to ask ourselves, “But what are we saving for? And where we should put this extra money stuff?” Our savings was growing, but without any real plan. We sorta knew what we wanted to save for, but we weren’t always sure how. Here’s what we knew we wanted:
- College savings for our kids
I think most people know what they want to save for, but they may struggle with the how. And a lot of the how depends on the what. Since we first started saving a few years ago, Johnny and I have become more purposeful in where our money goes. So here’s a quick and dirty guide for where you can put your extra dollars as they come rolling in.
Savings Accounts and Money Market Accounts
A lot of checking accounts out there are pretty much on par with putting your money under your mattress. In other words, your money ain’t going anywhere (unless a frenemy finds out you’re keeping it under your mattress). Savings accounts and money market accounts offer a little better return for parking your money in them. But with the better interest rates comes some consequences: you can only withdraw six times a month, per federal law. In other words, don’t use these accounts like a checking account — which is probably a good deterrent to keep your hands off your savings anyway.
- Risk: None
- Opportunity for Return: Low
- Accessibility: Medium
CD is short for compact discs, which are these really cool shiny things… kidding. CDs are kind of similar to savings accounts, in that your money is pretty safe. But unlike savings accounts, you have to keep your money in a CD for a specified amount of time. It could be a few months or up to 5 years. But because you’ve agreed not to withdraw your money until it matures, you can get a higher interest rate than with a typical savings account. And if you try to withdraw before the agreed upon time, you’ll face some stiff penalties.
- Risk: None
- Return: Medium
- Accessibility: Low
However you choose to save for retirement (4o1ks, IRAs, or what have you), you gotta be ready to say goodbye to those dollars for a very long time. But you can reassure yourself with the likelihood that when you meet that money again, it will have transformed from a mere calf to a stallion ready to ride you off to retirement paradise. (Johnny just told me that might be the weirdest line I’ve ever written. Thank you, Johnny.) You don’t just put retirement savings in for the long haul — it’s in for the really, really, super, duper, very, mostest, longest haul.
- Risk: Low-Medium
- Return: High
- Accessibility: Low (more accessible as you become less accessible… sad, really)
Other Investment Vehicles
Whether it’s the stock market, mutual funds, or some other investment vehicle, there’s one important rule: invest for the long haul. Markets go through peaks and valleys over the short haul, but over many years, they tend to grow. And the stock market is equally unpredictable and always presents a risk. If you put your savings in some mutual funds in 2005, you’d be kicking yourself if you needed that money a few years later. Wait a few more years and you’d be back on the gravy train. If you’re saving for the short-term (five years or less), this probably isn’t a good option.
- Risk: High
- Return: High (Potential)
- Accessibility: Medium
Where do you currently have your savings, and what are you saving for? Johnny and I are currently taking advantage of savings accounts, money market accounts, 403bs, Roth IRAs, and stocks. And we will neither confirm nor deny whether we take advantage of the mattress investment vehicle. If our frenemies ask, just tell them no.
Everything has risk even a money market account.. In fact Money Market accounts are generally not insured so if they do “break the buck” then investors have lost money (this is extremely rare but it happens). If they didn’t have risk, then the return on them would be zero. I would also argue CDs have rate risk. If you locked into a long term CD (which is never really that smart unless interest rates are really high and I could argue against it then too) and the rates increased you would be missing return and potentially losing money to inflation.
I’m saving all over the place. I have a 401(k), both flavours of IRA, bank/credit union accounts, a taxable investment account and I even have some precious metals, but those are mostly because I am a coin collector.
Good points, Brian. Interest implies there’s a risk you won’t see it again. I think the risk is certainly lower than the interest rate (meaning there’s far less than a 1% chance you’ll never see your Money Market money again), but there’s still a risk.
I’d love to get into coin collecting. It’s like the baseball cards for grown-ups… at least that’s how I see it.
You are very young and can afford to take risks with your investments. Not crazy risk but solid stocks and ETFs could make up a third to a half of your portfolio and be part of your retirement fund.
I am a decade out from retirement so I am sticking with GICs (Canadian version of CDs) and some very boring ETFs.
Your other savings can be divided in to the other categories in more conservative investments like CDS. You will be very far ahead in life if you can pay your mortgage off early and pay cash for a car.
Great points. Much of our retirement savings is in very aggressive stock funds currently because, as you mentioned, we have the benefit of being young and having time on our side if things don’t pan out.
We’re still a little leery of jumping into stocks for our our short-to-midterm savings. We’d like to buy a home before doing much investing with that money. But I think it makes a lot of sense for others* — asterisked to note “others who know what they’re doing and know how to invest.”
Another Canadian here too, so the terminology is different.
I have a TFSA (tax free savings account) that’s just a basic savings account with a pretty low interest rate. That’s my EF.
I have a savings account that I put my planned spending money in – that interest rate is a bit higher, but not by much!
I also have RRSPs (I think the 401k equivalent), but just a basic savings one, so again, the interest rates are pretty low.
I just paid off my student loans last week (yipppeee!) and now I am working on increasing my emergency fund to 6 months of expenses (about halfway there). In the meantime the plan is to plan for how I want to save for retirement and implement that plan in 2015. I’m a pretty conservative person, though, so I imagine it will involve GICs rather than mutual funds and the like.
Congrats on tackling your student loans! That’s awesome! Now the fun of saving/investing really begins.
A quick question(s) regarding savings…
How much should you haved up (like safe saved up.. in a low risk savings account) before you start diversifying the rest of your money with riskier savings? I’ve heard anything from three months salary to six months of your spending as the amount you should have put away to use in case of an emergency. When you started paying off your student debt- how much money did you have saved up? Or were you just lasered in on paying off the debt and hoping nothing happened that required a bigger amount of money saved.
Great question. And one we’re still trying to figure out ourselves.
First things first, as we were paying off our debt, we always had roughly half of our emergency fund saved (three of six months). As soon as we killed off the Debt Monster, we saved the remaining three months worth of our emergency fund.
As far as when or at what amount you should feel more free rein in investing, I don’t think there’s a standard rule. For us, we’re keeping things mostly conservative since we want to use our savings for a home purchase sometime in the near future. For that reason, we don’t want to put our short-term savings at risk. We are, however, investing in our retirement plans and doing so in an aggressive mix of stocks and funds. Since we have time on our side to right the ship should anything turn south, we’re comfortable maxing out the risk for the potential high returns.
My first priority and focus is to max out any and all tax-advantaged accounts I can (Roth 401k, Roth IRAs, HSA). If Uncle Sam is going to offer me a break I’m going to take it! Those funds are all invested in low cost ETFs.
For other goals I’m keeping money either in a checking or savings accounts for short term goals or investing it via a taxable brokerage account in more ETFs for long term goals. With today’s low inflation and low interest rates, CDs and money market accounts don’t interest me. No offense to others, but their rates seem menial and inconsequential. I’ll take liquidity and financial simplicity over whatever return they are offering.
Very good point — free and tax-advantaged money should always be at the top of the list.
It’s sad that we already sound like grandparents in our 20’s, but when I opened my Washington Mutual account in 2007, I was getting 4-5% interest in my Savings account. CDs were in the 5 and 6’s. That was less than seven years ago. Just crazy how far those rates have dropped.
Currently we are solely focused on beefing up the emergency fund. We’re treating this one as if it’s a debt we owe ourselves, so we’re throwing everything at it, with the goal of getting it ‘out of the way’, so to speak. We don’t want to take a whole year to build it (we’re aiming for six months) because we don’t want to miss out on anymore pre-retirement matching opportunities. Then we will begin to save for retirement (401k/IRAs) and set up a smaller savings account to begin to save for eventual car replacements (but, fingers crossed, we will have a few more years for that one), and we’re also going to be paying off the ol’ mortgage (this will probably take about 7 years). No kids but we are still cash-flowing college (for me) and vacations (what are those again?) are something that we cash-flow as well…
Good for you. Emergency funds aren’t sexy, but they really be your first priority after you’ve cleared the debt hurdle. I love the ambitiousness of your plans. Since we’ve been in indifferent-mode with home buying the last few years, we don’t really have a finite savings goal right now, it’s hard to really push for something. We gotta change that.
Hi guys! Well it’s been a busy bitterly cold day here in Toronto for me so I’m late in commenting to your blog today. So the question of the day is where do we have our savings. Without going into a lot of personal details let’s just say that we make every savings dollar work hard in earning a conservative, yet steady, additional amount of passive ongoing income through diversified balanced mutual fund investments. In addition to owning our house, being mortgage free and debt free, we also keep a limited amount of high interest savings account cash available for various purchase / investment opportunities. We don’t keep a low earning cash emergency account but rather have a $50,000 Line of Credit account (which so far we’ve never had to make use of but still provides all the liquidity that we might ever need).
We have a couple savings accounts, a money market account, mutual fund, a couple stocks, and that’s about it. Then there’s my pension, which is not at all accessible to me until 55. Next year, I’d like to add to a 403(b) to the mix. We recently started labeling the accounts for various purposes, which helps us visualize why we’re saving the money.
My husband and I are newlyweds and we have a savings account together as well as separate retirement accounts. I would eventually like to put money into stock but I’m not quite sure how to get started or what to start with. Any advice?
Hi lovebirds! We have a few things that we dabble in – certainly our savings accounts (combining accounts was kinda cool!) and we also max our 401-K contributions and started our IRAs and Roth-IRAs last year, which was a big win for us.
Our biggest investment win has been in investing through ETFs – we love it! It’s tied to the market so there’s definitely risks involved BUT since it’s minimized through the index investing theory, it’s been a good, steady introduction to stocks for us. Cheers and keep up the great job on the blog!
Since you are in Utah, ( me too!), I thought I would recommend a bank I have been using as a “high interest” account for savings: first utah bank. You have to use your debit card 12 times a month, and a couple other hoops, but the interest rate is 2.15 % on their checking account. I like that it’s a bank I can actually go visit if I want to check on my money 🙂
That’s an incredible rate. The loopholes are a tad annoying, but they certainly can’t give that rate out for nothing. Thanks for the tip!
This is a great breakdown to show the positives and negatives of where you can put your savings. Currently, I’ve got a 401k, savings and an IRA.