If you aren't putting your money to work, you might be missing out on some great opportunities.
My parents visited this weekend for our annual Valentine's Day double date. Part of the fun for the weekend is playing games together. My son is left out of the dinner and dancing, but he does get to play board games with all of us. We enjoyed the novelty of [easyazon_link asin=”B008MWWEJI” locale=”US” new_window=”default” tag=”moneyseed-20″ add_to_cart=”default” cloaking=”default” localization=”default” nofollow=”default” popups=”default”]Star Trek Catan[/easyazon_link], but the real highlight for my son is playing [easyazon_link asin=”B002JSM3KQ” locale=”US” new_window=”default” tag=”moneyseed-20″ add_to_cart=”default” cloaking=”default” localization=”default” nofollow=”default” popups=”default”]Monopoly[/easyazon_link].
Every time we play Monopoly, I'm struck by the lessons we can learn. This time, I was struck by the importance of putting your money to work for you, and not just hoarding it.
Putting Your Money to Work = Investing
A common strategy with Monopoly is to collect properties so you can start building on them. The more you build, the more money you can make. (We don't play with mortgaging, by the way, so we need the cash to make a purchase. No leverage for our Monopoly games.) While I am generally a bit risk averse, I do understand the importance of using my money to invest. And, indeed, I did so. Bought a few houses when I had the chance.
My mom, on the other hand, was afraid to buy houses. She didn't want to be caught short if she landed on someone else's property. And, even though she had enough money to buy a couple houses and still have a nice cushion, she was reluctant to make the expenditure.
At one point, she had saved up so much money that she finally felt ready to buy a house or two. Unfortunately, she didn't have that option — all of the house were gone. Additionally, during the time that she refused to buy houses, some of us had landed on her properties. She could have made more money if she had houses on those properties.
Rather than putting the money to work, she had hoarded it and it hadn't done her any good. She had missed out on opportunities to buy more houses (invest), so she didn't have the same assets that the rest of us had. Plus, she had missed out the income that would have come had she invested sooner. Eventually, I bought hotels to replace the houses I had built on my properties, and my mom was able to make a few purchases. However, by then it was too late; I was already in a position to win the game.
A Savings Account ? Putting Your Money to Work
My mom's Monopoly money was basically useless. It sat there, doing nothing for her, because she didn't want to invest. It was safer for the money to just sit there than to do any work for her. This is an attitude that can hold you back with your own finances.
Right now, we are in a low rate environment, and your savings probably aren't adding up. This means that keeping too much of your money in a “regular” savings account can be problematic. The returns are “safe” — at least in terms of the fact that your capital is FDIC-insured — but they aren't likely to beat inflation.
Letting your money sit uselessly in a “high yield” savings account isn't going to do much for you. In fact, you run the risk of?losing?money in real terms, once inflation and taxes are figured. Instead of letting your money sit idly by, put it to work on your behalf.
There are a number of ways you can boost your return without taking on unreasonable risk. Index funds and index ETFs, good, solid dividend stocks, and other good investments can help you build wealth over time. And, the sooner you start, the more you'll end up with. You can't replace the time factor when putting your money to work.
No matter what that investment is, research it, and make it a point to put some of your money into investments so that the money is working on your behalf.
You make some good points here, and it is important to remember inflation when you’re looking at your savings account. I often forget to do so. Still, I think it’s important to have an easily accessible emergency fund (not saying you don’t!), so to me, having some money in a savings account isn’t useless, though it can quickly cross a line. You can definitely have too much money in a savings account, especially if you’re afraid to invest. The question is, how much is too much? I’ve seen other people recommend keeping 3 to 6 months’ worth of expenses readily available for emergencies. Do you think the same or would you recommend a different amount?
As I’ve written in the past, I keep enough in a liquid high-yield account to cover immediate expenses for about three weeks. The rest of my emergency fund is in a taxable investment account, invested in an index ETF. That way, it’s growing, and it’s accessible — as long as I have the time to transfer it. So my emergency approach is one that many might not like, but it’s one that works for me. Immediate issues can be addressed, if necessary, and the money can tide me over until I liquidate shares. Also, in a serious pinch, I can access my Roth IRA and tap into contributions I’ve made without penalty, although that would be a last resort. I have enough in my taxable investment account that, even with a market drop, I’d still have the money to keep me going for several months. Here’s the link to where I’ve written about my emergency fund setup: http://mirandamarquit.com/my-emergency-fund-taxable-investment-account/
Thanks for the response! I can see how many people might not like your setup, but I see how it works for you. Thanks for the link too. It’s nice to see a different way to do it rather than hear the same old thing again. I personally would be a little uncomfortable with only 3 weeks worth of expenses in my savings account, granted that’s about what’s in there now. I’m on the “paying down debt” part of my financial journey rather than the aggressive investing part.
Really, it is about what works for you, and what you’re comfortable with. I call my taxable investment account my “emergency fund”, even though some would disagree with calling it that 😉 But that’s the account that is the biggest, and the money is liquid enough for my needs. Unless complete and total economic chaos and collapse comes. But if that happens, we will all have other things to think about, and we’ll all have inadequate money resources. Which is why I’ve got food storage and survival gear. But that’s another story altogether…
Great post Miranda. I only keep my emergency fund in an instant access account, the remaining 95% of my money is invested in Dividend Aristocrat stocks, P2P lending, Bonds, Mutual Funds and Investment Trusts. Great read.