One of the basic pieces of advice that we are often given about money is to save more.
But where do you put that money? And what should you do with it?
Create Goals for Your Savings
While saving money just to save money does make sense in some ways, the reality is that few of us are willing to keep doing something “just because.” As a result, it makes sense to carefully consider your desired outcomes and figure out what you hope to accomplish with the money you are saving.
First off, really think about what you hope to have happen with your money.
Do you want some of it to go toward creating a comfortable retirement? Do you hope to save up enough money for an emergency fund? Are there other goals, such as putting a down payment on a house or going on a family vacation that you are interested in reaching?
Understanding these goals can motivate you to keep setting aside money, and keep saving, as you plan your finances. It's too easy to lose sight of what you are trying to accomplish when you don't have clear goals for your money. Take the time to really stop and think about why you are saving, and then go from there. Once you have the proper motivation, you will be better able to to keep moving forward.
Where Should You Keep the Money?
Many savers are disappointed with the current low-rate environment. It means that they won't receive much of a return on their money. Part of feeling better about the situation, however, is understanding that the primary goal of some of your savings isn't to earn interest.
If you are saving up money for a down payment, or if you are looking for the liquidity and safety that comes with an emergency fund, it doesn't make sense to become fixated on interest rate. While it's depressing to earn so little on your money, the reality is that you have to keep the purpose in mind.
On the other hand, there are some goals that warrant keeping your money in an account with greater potential. If you are planning to build a significant retirement nest egg, you don't want to rely on a low-rate savings account. Instead, you should consider using an investment account. There are ways to limit your exposure to risk when investing. Using index mutual funds or index ETFs can help you take advantage of the potential for higher growth so that your retirement goals can be met.
I also like to keep some of my extra savings in an investment account. While I keep about three weeks' worth of expenses in a low-rate account, where it's accessible if I need it, the bulk of my emergency fund is earning in an account with an index ETF and dividend paying investments. That way, it has the potential to earn more, and I can access it if I really need it.
Combining my savings strategies helps me maximize my money, while still keep some of it safe and accessible.
What do you do with your savings?