A Beginner’s Guide To Saving Money 2020 :
5 Frequently Asked Questions

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1. Do I need to have a savings account?

Saving money is the basis for all financial success. Having cash on hand that is accessible enables you to live your life free of worry from financial hardship should a misfortune arise (health issue, divorce, etc), but also to take that trip, to buy that house or that car or that boat, to start a new business. Having cash on hand enables you to take advantage of investment opportunities when they arise (stock market crash, distressed real estate opportunities, etc.).

2. How do I start saving money?

The principle mechanism for saving money is through savings accounts and money market accounts. You can learn more about the differences here, but you should assume for all practical purposes that they are the same.

You can research the best rates on online savings and money market accounts here.

You can research the best rates on local savings and money market and accounts here.

Savings and money market accounts are also offered by credit unions where they are sometimes referred to as share certificates. You can research rates at those institutions near you here.

Short-term certificates of deposit (CDs) can offer a slight premium over savings accounts in return for sacrificing your liquidity for the term of the CD. CDs make sense for those who have excess savings over and above assets they anticipate needing over the short term.

You can research CD rates offered online here and those offered by banks and credit unions near you here and here.

3. What is the difference between savings and investing?

Investing involves risk. While there are all sorts of investment vehicles, for most investing means buying stocks in the stock market. In spite of the fact that the stock market has performed well for the last decade, it is dangerous to underestimate the level of real risk and how it could affect you. Suffice it to say, the stock market crashed in the 2000-2001 and 2008-2009 time periods. Fortunes were lost in those crashes and they will be lost in the next ones as well.

Investing can often feel like a “get rich quick” scheme. Savings, by contrast, is less exciting and never feels that way. Rather, saving money is the process of parking cash in savings and money market accounts where the principal is not at risk. By having assets out of the market, you’ll have the liquidity necessary to get through those next recessions or depressions, and be able to live without apprehension about getting by should markets and the economy turn south.

4. How much money should I be saving?

Many financial managers operate with a 60-40 or 50-50 recommendation for investing versus savings, and adjust this recommendation based on an individual’s wealth and the length of time until retirement. Your own risk tolerance and intermediate term view of the valuation of the stock market should be important for you in determining how much of your money should be in savings. Your asset allocation to savings will be different from those of your neighbors and your relatives. You should never want to be completely out of the stock market and you should never want to have less than a year of living expenses in savings as an emergency fund.

5. How far can a little savings possibly go?

A little savings goes a long way because saving money earns interest and interest compounds over time. Saving prudently produces greater interest in the short term, but even more interest over longer periods can be obtained due to the magic of compounding interest.

For those trying to understand the importance of compounding can experiment with the BestCashCow compounding interest calculator here.

When you understand compounding, you really understand the importance of reaching for the best interest rates that you can find on your savings. Always remember that there is competition for your money. Make it a practice to find the best savings and CDs accounts on BestCashCow.com in order to get the most from your savings. Bookmark BestCashCow.com and remember to check back regularly to be sure that your savings accounts remain competitive.