We have about $3000 I’d feel safe putting into some kind of, I don’t know, investment account or whatever? But I wouldn’t feel safe putting it into some full-fledged thing that doesn’t let you have the money back for years. I’d want to have access to it on demand.
And our monthly income minus expense is about $250, which we could put in as well.
These amount seem laughably miniscule to me, such that it has never occurred to me that our single-income six-member family should even think about “saving money” right now (aside from having the abovementioned funds in our practically zero interest “savings account” at the bank). We’re on a tight wire as it is.
But maybe I’m wrong. Is there something I should be doing with this?
I’m looking for practical advice, not moralizing or examples of people mistaking symbolic value for real value.
(I should mention the $250/month is after a hilarious deposit I make each month of $40 to my “retirement account.” I consider this to be useless and ridiculous, but the other person who has a say when it comes to my money has insisted. Do I have the wrong attitude about this? If so, why–and again, I’m looking for practical information not moralizing or insistence on symbolism.)
If that’s all the money you have you should keep it in the bank earning the small bit of interest it’s earning. It’s your emergency fund. If you build it up so that you have 6-12 months of expenses saved then you can start thinking of investing any savings beyond that. You should have money available in case you lose your job or have an unanticipated large expense. This money shouldn’t be invested in the stock market, bonds, CDs, or anything else that doesn’t let you get your hands on it quickly.
Certificates of deposit? They do lock up your money, but for short period (3 months, 6 months, 1 year). Your local bank probably offers CDs but you can also shop around for the best rates at other banks. It’s quite safe (zero risk of losing your money) with better interest rates than savings accounts.
I don’t know if having the money locked up in a short term way would work for you. You could always put half to CDs and keep the rest in traditional savings (though you should make sure you’re getting the best savings account interest rate you qualify for – it happens quite often that banks change their options without you the account holder really noticing.)
Good for you for saving any amount.
on edit, I agree that you should pay down debt once you have established a cushion. I disagree that you should use traditional savings until you reach 12 months of expenses. That isn’t efficient at all since savings accounts basically draw no interest anymore, and there is zero need to access one years worth of living expenses at any one time.
I came in to post exactly what Gus said.
As far as that $40 is concerned, Dude that’s free money. Even if your 401K is only matching 50 cents on the dollar, that’s 60 bucks! (Ideally) Over the course of your entire working career, that shit adds up.
It’s also fun watching it grow year after year. (Sans any recessions of course)
I’d say the same thing. Make sure you keep any work to keep any debt off your books and just keep it in a regular savings account. If that’s all the savings you have and you don’t own a house (that you can refi for some extra cash) that money needs to be liquid and in a place where the principal can’t be touched).
That’d be my recommendation, too: but not all at once. Buy a $500 CD with a 12 year rate on it every month (your $250 plus 250 of the hoard), and you’ll always have access to some of the money (what you haven’t put in yet, or what’s due this month). It also lets you skip a month if you need to.
But like others have said, this is only until you’ve got an emergency fund built up. Once you past emergency living expenses, returns become more important than immediate access. And if you’re not likely to need it urgently, even most brokerage accounts could let you liquidate and have money back in your account in a couple of weeks, as long as you’re careful about risk.
Only to the extent that the first thing to do – even before the emergency fund – is to pay off any credit card debt (unless for some reason you’re only paying 3% on it or something). Credit card interest is so high you should always pay it off as soon as possible.
After all, if you pay off your credit cards, rather than building an emergency fund, and then have an emergency, you can always just put all your living expenses on your credit cards, and you’re no worse off (except you’ve saved a lot of interest).
While it’s true there’s “free money” involved, think about how huge of a fraction $40 is of my monthly margin. $40 dollars in a month is actually a serious amount for us right now. I do not expect the few thousand extra I’ll have in 20 years to make that much of a difference. (Here I’m counting only $40 a month over the next few years. The expectation is my wife will eventually return to the workforce and at that point we’ll be in a position to do something more serious.)
Concerning credit cards, we do have some debt, I’m paying much more than the minimum each month, and once our “savings” meets the amount left on the card I’ll probably just pay it completely off and use it for a few months for emergencies should that become necessary.
Don’t even THINK about this until you’ve COMPLETELY disposed of your credit card debt; Credit card debt is going to run you at LEAST 5% interest, you’ll be lucky to get 1.5% on a CD, especially a short one.
If you’re under 40, you should be investing your 401k in moderate to high risk funds. Over the course of your lifetime, that $40 will add up to more than just “a few thousand dollars” [yes, with high risk funds you will see drops. but over the course of many years you will net a positive gain.]
Ideally, you want to invest 6% of your income. But hey $40 ain’t bad either. Trust me, when your old and grey, you’ll be thanking your wife for her insistence.
Right- unless somehow you pay less on your debt than you make on you investments, it’s always good to pay off debt before investing.
Example: If I had $10,000, I’d invest it at anything above about 2% because I pay slightly less than that on the student loan and would make money overall.
However, if I had 10k of credit card debt at 10%, I’d definitely pay that down rather than invest at 5%- I’d lose money in the long run otherwise.
But I’m with the others- put your 3k in a savings account, and once you’re happy with the amount you’ve saved as your rainy day fund, then start looking at CDs and other stuff, but not before.
Like I said, I’m only thinking about the $40/month invested over the course of three or four years. (I calculate $5262 after twenty years at seven percent.)
After that stretch of time, we expect to be investing much more. My own view is we should invest zero til then. The forty a month makes a much bigger difference to us now than $5000 will to us in 20 years. Her view is exactly the opposite of mine.
BTW the last thing I read which seemed sensible and well informed said the whole distinction between high risk and low risk funds is bunkum. Financially in the long run it makes no difference. Is that not so?
Are you getting any matching? If so you’d be close to insane not to use it. Even if you aren’t the tax benefits are still there (although maybe small at your income).
The distinction between low and high risk funds is not BS - generally the market pays you for risk. Over time - you are more likely to get close to historical averages. But there are lots of problems with a simple sentence like that due to survivorship biases and the like. That is probably what you heard.
You should be paying off credit card debt and building up an emergency fund. Any investments past an emergency fund should be made in tax advantaged IRAs/401ks first (anything with matching is top rate).
If you do not take advantage of matching - and I was married to you - I’d be royally pissed.
:smack:I forgot to include that in my math. Now it’s more like a $10,000 difference after 20 years, which does begin to sound more serious. (But let’s not overstate it. What will $10,000 be worth 20 years from now? And what’s the period of time over which that will be spent? Starts to sound pretty thin to me.)