Woes of the economy have people running scared from their finances. Many look at their money and think “if only I had more to work with…” and then fill in a dream they may never see.
The options of investing in retirement and savings accounts seem to be lacking, given historically low interest rates and recent economic downturns.
A few things to consider:
• Bad economies have dotted our history for years.
• People have been making these excuses for centuries.
• Successful savers have found a way to do it anyway.
• Opportunities may exist within a person’s existing portfolio.
Some strategies that can help stretch towards the savings goal are:
• Segmenting the Investment Goals.
Money, like dogs, can do a lot more than “sit still” and “stay.” Taking a careful look at a person’s financial needs can reveal such objectives as current or future income, estate needs, current liquidity, growth, “play” investments, and many more. Various financial products exist that can address each of these objectives, while minimizing taxes and even risk. Taking a closer look at a person’s objectives can help define where the dollars can achieve their maximum effectiveness.
• Combining Debt Payoff and Building Savings.
A common obstacle to saving is the perception that debt must be paid off first. However, human psychology dictates that experiencing interest in only a negative context will discourage rather than encourage financial responsibility.
Additionally, once the money has been put toward a debt, it can be difficult or impossible to access it if an emergency financial need occurs.
And in the current low-interest-rate environment, student, home and auto loans can be easily beaten through careful investment — regardless of a person’s risk tolerance. It is much more advantageous to build an account at the higher rate of return and pay off the debt in a lump sum once enough has been saved — or even to allow the debt to continue at the low rate while reaping higher returns in the side fund.
• Embracing a Low Risk Tolerance.
Considering their financial goals, age, ability to make a financial commitment and other factors, many have determined that they are averse to market risk.
However, in the current economic environment finding investments that will maintain safety of principal while providing rates of return that beat inflation is difficult. Many “safe” interest-bearing accounts have provided negative rates of return relative to taxes and inflation in almost all of the past 20 years.
For risk-averse investors, insurance companies and banks can offer products such as annuities that can provide superior fixed returns or even guarantee a floor on market performance. Although they are not FDIC-insured, due to the high statutory reserve requirements placed on these products they are relatively safe, as long as an investor is willing to wait out the early-withdrawal penalty period.
As in all decisions, it is important to review the financial strength ratings that indicate the strength behind the company’s guarantees through independent agencies such as Standard and Poor’s or Fitch, as all annuities are subject to the claims-paying ability of the issuing insurer.
You can find more information at the rating agencies’ websites.
Whether it’s losing weight, going back to school, or saving, the “simplicity” of the concept does not necessarily guarantee success.
Losing weight simply requires an increase in activity and a decrease in calorie intake. It may be “simple,” but it’s not “easy.”
So it is with saving, and in both cases the pain is quickly forgotten as it becomes a habit and results start to show.