Know the Difference Between Saving & Investing

 

Saving is the act of accumulating money safely — in a bank savings account, certificate of deposit (CD) or a money market deposit account — generally for short-term needs like upcoming expenses or emergencies. Typically, money placed in such accounts earns a lower, fixed rate of return. Your money is generally protected by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to certain limits and can be withdrawn or accessed with relative ease. Ideally savings should be liquid and easy to access. If you use CDs for savings, be aware that in some cases, CDs may have penalties for early withdrawal.

Investing requires you to take a risk with your money by buying securities, such as stocks, bonds or mutual funds, with the hope of earning higher, long-term returns. Investments generally do not offer the safety that a savings account does, so your capital is at risk. In return for taking that risk, you have the potential for a more rewarding gain.

 

Pay Yourself First

 

Think of setting aside money as paying yourself a salary. The sooner you begin to save and invest, the more you may accumulate over time. Consider the following:

• Automatically transfer a portion of your pay to a savings account through an allotment or direct deposit. That way, you may have less temptation to spend the money.
• Create an emergency fund. Experts recommend having at least three to six months of basic living expenses — enough to manage a crisis without borrowing money. The fund should be low-risk and liquid, so the money is available whenever you need it.
• If you begin setting aside money in your 20s strive to save at least 10% to 15% of your monthly gross income. If you cannot afford this amount, allocate as much as you can. The key is to begin now. If you wait until later in life, you will need to save more.
• Increase contributions when you can. For example, consider putting some or all of your pay and longevity increases, promotions, federal income tax refunds, gift money, and rebates toward your goals.

 

Earn Interest by Saving

 

Not all interest rates are calculated the same. For instance, consider the difference between the ways simple and compound interest are calculated.

• Simple interest is calculated only on the principal balance. In addition, it is calculated generally for a single period of less than a year, like 30 or 60 days.
• Compound interest is calculated on the principal, plus all interest previously earned. The interest can be compounded daily, weekly, monthly, quarterly or annually. It is important to note that the more often the interest compounds, the greater your earnings.

When comparing financial institutions, make sure you have answers to these three questions:

• How much can I expect to earn?
• What is the risk?
• How long will my money be tied up?

 

Invest to Increase Potential Returns

 

Start Early: The earlier you begin to save and invest, the more you can accumulate with time. Consider what financial advisors refer to as "The Rule of 72."

• For example: If you earn a 10% rate of return, your money doubles in approximately 7.2 years. However, if you earn 2% more, your money will double in six years.
• Between the ages of 22 and 67, or over 45 years, your money will double 6.25 times at a 10% rate of return or 7.2 times at a 12% rate of return. A small increase in the rate of investment return can mean a significant increase in your money over time.

Before You Invest: Investing involves risk; as a general rule, the more risk you take, the more you should be rewarded for it. Take time to understand various investment options and how they work. Do not invest more than you can afford to lose. Consider these questions before you invest:

• Is my primary investment goal to keep my money safe or grow my investment?
• What is my risk tolerance?
• Am I willing to take on the risk of my investment decreasing in value in exchange for potentially higher returns?
• Is my investing time frame long enough?
• Will I need access to my money, or can it remain untouched and potentially yield a higher return?
• What federal or state income tax issues should I consider when investing?
• What fees will I be charged for my investments?

 

Consider Dollar Cost Averaging

 

Rather than trying to pick the “right” time to invest, many investors employ dollar cost averaging instead. This approach involves continually investing in securities regardless of fluctuating price levels. Note that systematic investment plans do not ensure a profit or protect against loss in declining markets.

The rise and fall of stock prices in the short term are part of the risk of investing in stocks and stock-based investments. These types of investments should be made with a long-term perspective of five years or more. That way, you potentially have time to recover losses by holding onto the investment. Even though there have been many ups and downs, the movement of the market has generally been in an upward direction.

If you invested using the dollar cost averaging strategy, you may have purchased shares at many prices. When prices were high, you would have bought fewer shares. When prices were low, you would have purchased more. Had you abandoned your dollar cost averaging strategy during the times the market was falling, you could have lost the opportunity to buy securities when they “went on sale" and were sold at a discount.

 

Tips to Plan for Deployment

 

Deployment can be a challenge for military families. As military spouses, you remain at home caring for children, working, handling finances, managing the household and making many important decisions on your own. It is important to plan ahead.

Begin thinking about family, financial and household matters now while you have time to make thoughtful, informed decisions. Before deployment, consider setting savings and investing goals with your spouse and be sure to review your situation regularly to ensure you are meeting your changing needs and circumstances.

Keep the lines of communication open with your Service member as he or she returns home from deployment. Determine what to do with money your family may have saved during deployment. Avoid large impulse purchases; make sound, long-term choices. Consider consulting with a Personal Financial Counselor on your installation before making important investment decisions.

The section below contains more tips to help you manage your family's money.