For educational and informational purposes only, This is not a recommendation to buy, sell or invest. Please consult your advisor and tax consultant.
Spending less than you take in and using this surplus for wise investments is an important tactic to sound financial health. Money management involves working with budgets to understand and make choices about where your cash is going. This also means knowing how to make this surplus of money work best for your needs. Here are some things you’ll need to understand when it comes to money management:
- How time may affect your ability to reach your money goals
- When and how to rebalance your money portfolio
Managing your money correctly can free up assets for investments and saving; not to mention, effective investors understand the value of time because investing early allows the money to grow over an extended period. When it comes to long term investments, the rate of return will fluctuate over time. Additionally, investments that offer the potential for high returns also carry a high-risk factor.
With a little knowledge on role time plays in your long-term investments, you can make more intelligent decisions when it comes to assets management.
The Role Credit Scores Play
A solid credit score can affect your purchasing power in addition to potentially increasing savings over time. To better illustrate this, let’s use a 30-year fixed-rate mortgage as an example.
Let’s say you took out a $500,000 loan for your new home with a credit score of 635 and qualified for an interest rate of 6%. Based on this information, your monthly payment would be $2,998. Now, what would happen to that same $500,000 loan if you had a 775 credit score and got a 4% interest rate instead? Your monthly payment would be $ 2,387.
Let’s break down the difference between those two options:
- Monthly difference: $611
- Yearly Difference: $7,332
The difference over the Lifespan of the mortgage (30 years): $219,960. It’s quite the transformation just based off of a credit score.
Cash and Cash Alternatives
Another strategy that aids in financial health is finding the appropriate combination of investments. Cash substitutions are at the base of a sensible portfolio because they allow you to meet immediate and irregular expenses. Having cash and cash alternatives will allow you to manage other investments instead of selling at what may be an inopportune moment. The purpose here is to manage investment risks by assigning assets to different investment opportunities.
Keep in mind, the FDIC insures bank accounts up to $250,000 per an investor and institution; however, some alternatives, like money market funds, are not covered by the FDIC or any other government agencies. This means that it is possible to lose money by investing in other cash alternatives.
A Solid Approach to Saving
After the financial crisis of 2008, the American population broke a longstanding trend of little personal savings and began increasing the amount of money saved by the average person. During this time of financial mayhem, the personal savings rate began to climb and continued to climb during the recession. In general, the US has a pattern of saving during rough economic times and spending during more fruitful times. However, a consistent and steady approach is more favorable for saving.
For the liquid portion of a portfolio, many investors consider multiple places to invest; each one with its own unique advantages and disadvantages. Let’s take a look at some examples:
1. Traditional savings accounts are guaranteed by the FDIC up to certain amounts but these accounts have modest returns.
2. Certificates of deposits may offer higher returns than traditional savings accounts but might require a larger deposit amount. Additionally, CDs can be subject to penalties such as early withdrawal.
3. Treasury bills are debt-based meaning depositors lend money to the government. This lent money earns a specific rate of return. If a treasury bill is sold before it has reached its full maturity then it is possible to lose capital.
Generally, cash alternatives:
- Offer lower risks
- Have smaller potential earnings
- Are susceptible to taxes and/or inflation
There are three main areas in life you want to consider when it comes to having enough cash reserves on hand:
1. In the event of a job loss or investment loss, ideally, you’d want to have enough reserves to cover these losses for a comfortable period of time. If possible aim to have 3-6 months of cash readily available. Conversely, you can set a fixed dollar amount that applies to your specific needs.
2. try to have an emergency fund available. This is especially good to have if an unexpected injury or illness occurs.
3. Keep upcoming large expenses in mind such as vacations and car maintenance.
Looking for Savings
Each individual is unique so there may be special concerns that will influence your investment portfolio; one size doesn’t fit all. It is important to look into outbound expenses and fine tune the cost down to those that are completely essential. This will help you understand how and where you can begin to save.
Consider these things:
- Number of income sources
- Amount of debt that needs to be paid
- Special circumstances in your life
Always remember that the liquidity of your funds has a large influence on your investments portfolio. If you have investments that are readily available, your portfolio may require a smaller savings amount. If your reserves have little to no liquidity, then it may be wise to have larger savings on hand, perhaps for a longer period of time.