**The following episode transcript has been generated automatically.**
For me, my goal was $10,000 worth of liquid assets for my rainy day fund. What I want to do is have $1,000. Good for you. It may be $2,000 or maybe even $1,000 or $5,000 or $25,000, depending on your income. You just want to have a nice chunk of change to pull from when needed. You don’t want to rely on credit, go into debt, and end up in bankruptcy because of an emergency. That’s why I mentioned your HSA because medical emergencies are one of the top reasons people end up in debt or bankruptcy.
So, *NerdWallet* was searching earlier for some ideas for long-term savings. They gave me a whole bunch of ideas, but one of the best things I found there was a super cool savings account. It pays a 0.09% interest. I think mine is even less than that. But if you’re only getting 0.09%, that means you make $9.60 for every $1,000. We’re here on APR. Whatever you’re making, it’s less than allowing for holding points $1,000 a year. That’s not good. When you’re dealing with long-term savings, always remember that there is a trade-off.
Actually, when dealing with long-term versus short-term, time value of money kicks in. The theory is that $1 today is worth more than $1 tomorrow, and even more in the future. Because if you have $1 in your hands today, after all, you’re using it to make money, you can put that dollar to work today. If you aren’t getting $1 in the future, that dollar in the future would be worth less money today due to inflation and the cost of lost opportunities. That’s it. Every time you decide to spend money, you make one choice over another choice, and decisions always have consequences. The consequence is that you can’t be in two places at once.
You can’t rewind time or spend money twice. For every decision you make, you give up $1 ready for another opportunity, and that’s where opportunity cost comes from. Going with savings, specifically long-term savings, but even in the credit world, there are trade-offs. If you want to put your money into liquid and accessible cash, you’re generally going to have to make some type of trade-off that will affect your returns. For instance, putting your money in a savings account, like your checking account, is one of the easiest and safest places to put your money. You can put money in and take it out easily, and you have a lot of liquidity.
The pandemic came, but because we have a lot of liquidity and it’s FDIC insured, you won’t get the higher interest that you would get if you were to invest in the stock market. So there’s always a trade-off for liquidity, and if you’re returning to your district, you want to make the most of it. When you decide to save money, savings aren’t risk-free, but they’re a lot safer than investments. Saving is all about setting your principal aside for later use, while investing is all about putting your money to work where it could lose or gain value, depending on the risk of your investments. The more risk you take, the more return you can get.
Every day, people pay millions of dollars, winners and losers. The reason why they can afford to do that is that there’s a very high chance to win when you start playing games that are easier. With the carnival, did you know that the prizes get really cheap when you’re down to little cheap plastic things? We start taking more risks and spending more money. Isn’t that like the carnival analogy? We start getting those giant stuffed animals that are almost impossible to get. That’s the risk-reward ratio when you’re dealing with money, whether you’re saving or taking on debt for something.
The further into the future, the more risk you want to be charged more interest for taking on that risk. The same thing goes with savings, except you’re being paid interest. In the case of a 30-year Treasury Security, you’ll get paid higher interest than inside a bank account because your money is accessible. You know you can get it in one year and six months. When you’re as thick as a treasury bond, you’re locked in for 30 years. So just remember that dynamic when it comes to all of this savings and investment stuff.
Now, let’s go over some long-term investment options available to most people. I’ll also share how I manage my long-term investments. Because I have established my $10,000 rainy day fund, I want to invest some of it. We don’t want to put it in a 30-year bond. First, you have stocks, which are more like investments rather than saving instruments. You want to make sure your money is liquid, and you aren’t too worried about the principal value climbing or decreasing. I don’t have stock investments and index funds, index bonds, or mutual fund ETFs. All three are also options. I’m not a fan of bonds right now because of interest rate risk. Bonds have an inverse relationship with interest rates. Right now, interest rates are threatening to go up.
The Federal Reserve is always talking about raising interest rates, and as interest rates go up, the bonds you currently have become less desirable. When interest rates are low, bonds with a higher interest rate are more desirable because you’re locked into that rate for the bond’s duration. You can lock in that rate for the next 10, 20, or even 30 years, unlike a bank account where the interest rate can change. However, if interest rates go up, bonds paying 0.09% won’t be as attractive, and people may prefer to put their money in a bank and get 3%.
That’s the relationship. When it comes to bonds, I prefer government bonds or Treasury securities, not municipal bonds or corporate bonds. If I were to own any bond instruments, I’d probably choose a bond fund. It’s easier to maintain, and you don’t need to be a bond expert. Just read the prospectus and make sure there aren’t high fees.
The following episode transcript has been generated automatically.
For me, my goal was to accumulate $10,000 in liquid assets for my rainy day fund. What I want to do is have at least $1,000, although it could be $2,000, $5,000, or even $25,000, depending on your income. You want to have a substantial sum readily available for emergencies, so you don’t have to rely on credit or risk going into debt or bankruptcy. This is why I mentioned having an HSA, as medical emergencies often lead people into financial difficulties.
NerdWallet was searching for some long-term savings ideas, and they provided me with several suggestions. Among them, the best option I found was a super cool savings account that offered a 0.09% interest rate. In reality, mine might even be lower. If you’re only getting 0.09%, that means you’re earning just $9 for every $1,000 saved annually. When dealing with long-term savings, it’s crucial to remember that there is always a trade-off.
In long-term savings, you need to consider the difference between short-term and long-term investments. The concept that $1 today is worth more than $1 tomorrow holds true. Even more so, if you can invest that dollar today and generate income from it, it would be worth even more in the future. But if you keep that dollar in your hands without making it work for you, it will be worth less due to inflation and the opportunity cost. Every financial decision you make has consequences, as you can’t be in two places at once or spend your money twice.
You can’t rewind time or spend money twice, so every choice you make has an opportunity cost. This concept holds true whether you’re saving or investing. Saving is safer, with the primary goal of preserving your principal for later use, while investing involves putting your money to work, where it can potentially increase or decrease in value. Your investment’s risk level determines the potential returns, with higher risk usually leading to higher returns.
The heart of the matter is that every day, people win millions or hundreds of dollars, and the reason they can afford this is because there’s a high risk involved. As you start playing games that offer bigger prizes, you also take on more risk, akin to a carnival game. Initially, the prizes are great, but as you take more risks, the rewards become harder to attain. This illustrates the risk-reward ratio when dealing with money, whether it’s saving or investing.
The further into the future you’re willing to commit, the more interest you’ll be charged for taking that risk. The same applies to savings, where you earn interest. For example, a 30-year Treasury Security will offer higher interest than a regular bank account. Just keep in mind the trade-off when it comes to savings and investment.
Now, let’s explore some long-term investment options available to most people and how to manage them effectively. If you’re building up a $10,000 rainy day fund and want your long-term investments to remain somewhat liquid, consider options like stocks, index funds, ETFs, or mutual funds. However, it’s crucial to prioritize liquidity in your investments to ensure accessibility when needed.
Bonds are another option, but it’s important to note that they carry interest rate risk. When interest rates rise, the value of your bonds may decrease, making them less attractive. On the other hand, when interest rates fall, higher-yield bonds become more desirable. Right now, with interest rates at 0.09%, it’s a risky time to invest in bonds, as rising interest rates could devalue your existing bonds.
When considering bonds, focus on government bonds or Treasury securities. Corporate and municipal bonds can be riskier and may not provide the same level of security. If you choose to invest in bonds, a bond fund can be a more manageable option, especially if you’re not an expert in the field. Just ensure that you carefully review the prospectus and fees associated with the fund before making a decision.