Friday, June 4, 2010

Value is what you get

A few of the main goals of savings are for growth and security. I looked into different types of savings briefly and have come up with some pretty basic stuff. According to Crown Financial Ministries, there are three main types of savings. The first is an emergency reserve fund. It to be used for emergencies and then replenished. The second type is an accumulation fund. This is used for large expenses or major purchases. Last, but certainly not least are long-term investments which are designed for family security, inheritance, and retirement.

Emergency reserve funds can be obtained through banks, credit unions, and money market mutual funds. The key is to seek savings accounts that have little if any withdrawal penalties and fees. As a general goal, one should try to keep this fund at the equivalence of three to ideally six months pay in case of an emergency of injury or sickness. Even a small amount of $5 a week will accumulate. Banks will usually offer the lowest savings rate, with credit unions being next in line, and money market mutual funds offering rates 1-2 percent higher than credit unions. The key to any of these is liquidity and safety so in case of an emergency one needs not worry about the availability and fees to the withdrawal of their funds.

Accumulation funds essentially are longer term reserve funds. It can cover unexpected major expenses or large purchases. These funds should be used sparingly, letting value accumulate. With a larger time frame in mind of 1-5 years, one should seek higher returns instead of easy liquidity. Types of investments that fall into this range include certificates of deposit (CDs) or short term bonds. The time frame of CDs one should look into can range from 6 months to 2-5 years. Longer term CDs often offer step rates which increase in 6 month periods. CDs offer safety and reasonable returns but lack flexibility due to early withdrawal penalties. One should shop around for the best rates when deciding to open up a certificate of deposit. Short term bonds can be in the range of two to three years, and offer the potential for better returns at a slight increase in volatility.

Long term investments help your family achieve a greater degree of security, provide an inheritance for your family, and fund retirement. According to Crown Financial Ministries there are five tiers for long range investments.

Tier one. Secure income investments, such as government securities.
Tier two. Long-term income investments. These are investments that are higher risks but have a higher rate of return, such as municipal bonds, mortgages, corporate bonds, insurance annuities, stock dividends, and money funds.
Tier three. Growth investments such as undeveloped land, housing, and balanced mutual funds.
Tier four. Speculative investments such as common stocks/aggressive growth mutual funds, and precious metal options.
Tier five. High-risk investments, such as gold and silver, oil and gas, commodities, collectibles, precious gems, and limited partnerships.

As a general rule, only 5 to 10 percent of your investments should be in cash, or be in liquid investments. These can even include bonds, certificates of deposit, Treasury bills, and money market funds. In addition, no more than 5 to 10 percent, if anything, should be invested in high-risk vehicles.

With a combination of financial discipline and maintaining a well prepared budget, saving is the best way to prevent being encumbered by debt.