Savings are an essential component of a healthy financial situation, but, in some cases, it’s possible to have too much cash in highly liquid savings accounts. If you feel like you have reached a point where you are comfortable with your savings, then it’s time to start considering investing in the stock market, bonds, or other investment products.
How Much Do You need to Save?
Cash savings accounts should only be used for short term and mid-term goals. Purchases such as a house, car, vacation, or an event like a wedding are all suitable for cash savings in a standard high rate account or a maximum 5-year certificate of deposit.
In addition to saving for short term goals, you should also maintain an emergency fund. Financial advisors recommend that you save at least the equivalent of three months salary. If you can save more, then aim for six months or a full year.
An emergency fund should not be tied to a certificate of deposit because you will incur heavy penalties if you withdraw before the maturity of the account.
For Everything Else, Investment Provides Better Returns
Cash savings accounts are not a bad place to store your money, but, they are a poor choice when you want to grow your money. Even high interest savings and certificate of deposit accounts will offer less than 4% return in most cases. By comparison, a well-diversified portfolio on the stock market could offer 8% or even higher if you research your stocks and invest wisely. Large indexes like the NASDAQ Composite have exceeded 20% growth this year, outperforming standard savings products by a large margin.
Investing When You’ve Saved for a Rainy Day
Some people like to argue the benefit of investing vs. saving. In the real world, it is best to do both. The key is to know when to switch over. The time to switch is when you have met your savings goals for short and mid-term purchases, and when you have covered yourself for a financial emergency.
When you get yourself into this position then you will be able to shift your focus to a robust investment portfolio. This offers the potential for long term returns that no standard savings product will ever be able to match.
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