The latest recession highlighted the importance of savings and investments to many people – more so to those that had none. Perhaps you have decided that you need to save but are not sure how to go about it. You should have both long-term and short-term savings plans in place.
Start with Short-term
Savings Short-term savings are classified as those that are typically only for a few months to a year. You should have a cushion of at least three month’s salary to fall back on in case you lose your job or are unable to work. This money should be kept in a fairly liquid account such a savings account or a short-term notice deposit. If you have a mortgage that allows you to draw out extra funds, you can also place the money in there – you will not receive interest but you will save a lot of interest on your mortgage and this will help to reduce the term. You should also attempt to repay as much debt as possible – the interest that you pay on credit outstrips any interest you may receive on savings.
Make a Long-Term Plan
A long-term plan refers to investments that are typically have terms of five years or longer. In order to balance out the conservative gains in your savings account, you need to add an element of risk into your investment portfolio. If you do not do this, it is unlikely that your investment will keep pace with inflation. Examples of long-term investment are stocks or unit trusts. If you cannot afford to buy blocks of stocks or want to diversify more, unit trusts are the way to go – unit trusts allow people to pool their small investments, the fund manager uses this pool of investments to fund stock purchases, etc. it is important to note that stock market and unit trust investments are linked to the vagaries of the stock exchange.
You need to leave the funds there at least three to four years in order to smooth out the bumps in the road – with stocks, your investment value fluctuates and this can mean that your investment can halve in the space of a day. Usually, the longer the term, the smoother the average growth rate. It is this element of risk that allows these funds to outperform inflation. You need to invest carefully, however. Do your research before investing in any fund or stock. In the end, you need to ensure that you are saving as much as possible. The ideal minimum is ten per cent of your gross salary. It is important for your financial future to implement a savings plan today.