Savings or Investments? Where do you put your money?
One of the more embarrassing questions I’m often asked by friends, family and colleagues is where do investment managers like us, put our money. Like most people, our hard-earned money is generally allocated between our savings/checking account, and whenever there’s some left over, our investment account. From someone whose job is making sure the company makes the right investment decisions, these two accounts can serve very different needs and can be very specific to each individual. There is no hard and fast rule in allocating money for savings and investments
However, there are some general guidelines from which one can begin to develop their own allocation.
In a nutshell, savings is a source of instant and assured liquidity, where one can draw from anytime for any emergency or need. My first step in determining the size of my savings account is to figure out, how much money I need for certain short-term emergencies or needs I might face. Am I going on a holiday this coming weekend? Am I expecting some visitors in the household? Do I foresee spending for my car requirements this month? How much do I usually spend when I get sick?
Since I require liquidity, it shouldn’t come as a surprise that I also expect a much lower rate of return for my savings/checking account. The lower rate is the price I need to pay for having near-instant access to my cash. It’s also the price I pay for the assurance that I’ll get my money back. So this provides me short-term assets (cash), for short-term needs.
Investments, on the other hand, is there to provide some return in exchange for less liquidity (and sometimes even no liquidity) for a fairly long period of time and at a higher risk.It generally provides less assurance of getting your money back. When thinking of investments, the money I allot for this is the money I don’t need as urgently as I would with my savings. In exchange for less or even no liquidity and less certainty, I expect to get paid a higher return.
In contrast to savings, investments provide me long-term assets, for my long-term needs such as retirement, to travel if I want to in say, 5 years, for my kids’ schooling or if I just want to buy a big-ticket item in a few years’ time . One very critical dimension of an investment account is, it must always be well diversified. This helps spread-out the risk and increases the chances of favorable returns or at least getting a portion of your money back
Within each account lies a myriad of different options to suit every individual’s needs. However, knowing the difference between the two is an excellent first step to planning one’s financial future.
Jed Garcia has been working in the financial markets for more than 15 years and has been a fund manager for 5 years. If you have any questions, you may email him at jed@itstime.com.ph.
A cool mom and a supportive wife. This pretty much summed up what Pia Arroyo-Magalona was to the public. But this was before her husband, rap icon Francis Magalona passed away early this year. All throughout the entire ordeal, from the time Francis was diagnosed with acute myelogenous leukemia in August last year until he succumbed to the illness in March 2009, people discovered more about Pia. She was a picture of calm and quiet grief. A pillar of strength for her eight kids and the hundreds of friends and supporters who came to grieve with them.
