Here’s Why Putting Your Savings in the Market Could Backfire — and What To Do Instead
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You don’t need a financial expert to tell you that saving money is essential. From retirement to a rainy day, you need money stored up to get you through the hard times and the good times — and everything in between. But without clear guidance on how to save, many people still default to simply “letting it sit” without a strategy.
Fortunately, experts like Jeff Rose, CFP, founder of Good Financial Cents, are here to give you more in-depth information about how to save strategically. Every day, he helps clients identify their goals and choose the accounts and products most likely to help those savings grow.
GOBankingRates caught up with the author, entrepreneur and Iraq combat veteran as part of our Top 100 Money Experts series to learn more about smart saving.
Need Your Money To Do a Job? Try a High-Yield Savings Account
Even casual savers know they need an emergency fund. But parking that money in a regular savings account is simply allowing your money to stagnate. A high-yield savings account earns interest over time, so your money grows while it waits to be used.
But Rose said other kinds of savings can also live in an high-yield savings account. Saving up for a car? A college fund? A down payment on a home? You’ll want that money to earn interest and, most importantly, be accessible quickly. Other vehicles don’t always offer that kind of liquidity.
“If the cash has a job to do within the next three years — cover an emergency, fund a down payment, pay tuition — it belongs in a high-yield savings account,” he said. “Market fluctuations over such a short window can erase gains right when you need the money, so safety and liquidity win out.”
Rose has seen clients learn this lesson the hard way — including one who suddenly needed college funds during a market slide. Since then, he’s advised clients to keep anything with a near-term deadline in a high-yield savings account with ample liquidity.
Feeling Stable Financially? Time To Invest
If the high-yield savings account is a great place to store money you may need in the short term, a disciplined investing plan is your first major step toward building long-term wealth.
However, Rose advises waiting to invest until you’ve cleared a few hurdles. Is your emergency fund locked and loaded with three to six months of expenses (more if you’re self-employed)? Are you carrying high-interest debt that could erase your progress faster than investments can compound?
If the answers are yes and no, respectively, you’re in a good position to enter the stock market. Before you do, consider your time horizon and whether you truly understand the investment. Could you explain it to a teenager? If not, it may not be the right fit for your money.
“Finally, ask whether a 20 percent drop tomorrow would keep you up at night,” he said. “If the answer is yes, you’re not ready to invest that chunk just yet.”
Overflow Can Lead to Growth
Rose thinks of the money he’s saved as two buckets. There’s the “security bucket” he keeps in high-yield savings to handle life’s curveballs. Then there’s the “growth bucket” invested in the market for long-term goals. But savings isn’t an either-or proposition for him — every paycheck sends money to both buckets. And once his security bucket hits its target, the overflow goes to growth.
“That structure let my wife, Mandy, and me stay fully invested through the 2009 downturn because we knew the ‘roof-starts-leaking’ money was already safe,” he said. “Growth and security aren’t rivals; they’re teammates, and giving each a clear role makes it easier to sleep tonight and retire tomorrow.”
Bottom Line
Skip outdated saving habits and focus on strategy instead. Use a high-yield savings account for short-term goals and emergencies, and invest for long-term growth once the essentials are covered.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
This article is for informational purposes only and does not constitute financial advice. Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.
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