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Published byAllen Skinner Modified over 8 years ago
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Savings Options
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I. Importance of Saving
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A. To buy…without paying interest.
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B. For emergencies: can you pay your deductible?
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C. For retirement. Because Social Security’s future is uncertain, and it is not enough anyway. (average $1079/month)
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D. It is not enough to just save, you must make your savings grow. Because what is constantly nibbling away at your savings?
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INFLATION! And the IRS…
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Your savings must grow an average of 3% yearly just to keep up with inflation.
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II. Where to save. Some important considerations...
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The key to monetary growth: Time
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Rule #1: Start saving at a young age. Compound interest (interest computed on the sum of an original principal and its interest) and compounding dividends leads to exponential growth So do stock splits. 1>2; 2>4; 4>8, and so on.
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Rule #2: Before deciding where to put your savings, decide what those savings will be used for. Consider these three things:
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A. Rate of return: The % by which your principal grows over time. Includes interest rate. Does your rate of return beat inflation???
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B. Ease of access: Generally, the easier and quicker the asset is to turn into usable cash (liquidity), the lower its return.
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High liquidity:
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B. Ease of access: Generally, the easier and quicker the asset is to turn into usable cash (liquidity), the lower its return. High liquidity: Checking account (0%)
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B. Ease of access: Generally, the easier and quicker the asset is to turn into usable cash (liquidity), the lower its return. High liquidity: Checking account (0%) Low liquidity:
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B. Ease of access: Generally, the easier and quicker the asset is to turn into usable cash (liquidity), the lower its return. High liquidity: Checking account (0%) Low liquidity: CD (3%)
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C. Risk: Generally, riskier investments have greater possible returns (and losses).
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Low risk:
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C. Risk: Generally, riskier investments have greater possible returns (and losses). Low risk: Savings account (<1%)
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C. Risk: Generally, riskier investments have greater possible returns (and losses). Low risk: Savings account (<1%) Higher risk:
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C. Risk: Generally, riskier investments have greater possible returns (and losses). Low risk: Savings account (<1%) Higher risk: Stocks (-100% to +250%)
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Famous rule #3: Money is like manure. If piled in one place, it ~stinks~. But, when you spread it out, it makes things *grow*.
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Famous rule #4: PAY YOURSELF FIRST! Invest consistently! Have funds automatically withdrawn each pay period.
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“Be fearful when others are greedy and be greedy when others are fearful.” -Warren Buffet, 2 nd richest human in America.
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