SAVING & INVESTING TO GROWTH YOUR PERSONAL FOUNDATION

SAVING & INVESTING FOR GROWTH

“Time is your greatest ally in the world of investing. Start early, stay disciplined, and let compounding work its magic.”

Building wealth is similar to growing a plant. Just as a plant requires care, patience, and the right conditions to thrive, building wealth requires saving, investing, financial education, and strategic planning.

When you start growing a plant, it begins with a tiny seed or sapling. Similarly, building wealth sometimes starts with small amounts of money, such as a small portion of your income or modest investments. Like a seed, this initial capital can grow substantially over time.

Furthermore, a sprouting plant needs a suitable growing environment. Likewise, building wealth requires creating a favorable financial environment. This includes making informed decisions about where to invest your money, minimizing unnecessary expenses, and diversifying your portfolio. Just as plants thrive in suitable soil, sunlight, and water, your wealth can flourish when you choose where and how to allocate your resources.

Moreover, patience and consistency are key. Plants don’t sprout overnight; they require consistent care and attention. Similarly, building wealth is a long-term commitment that requires patience and persistence. Just as you regularly water and nurture plants, you must consistently contribute to your savings or investments, allowing compound interest and market growth to work in your favor over time.

Hence, this artcile will discuss different strategies for saving and investing money.

HOW TO SAVE MONEY AND MAKE IT GROW

Aside from saving for rainy days, there are many other reasons why it’s essential to develop a money-saving lifestyle; let’s explore some of these good reasons below:

• Saving Money for the Future: Keeping cash allows you to plan for your future and achieve financial independence. It offers you the means to save for retirement or invest in a long-term goal, like buying a home or starting a business.
• Better Money Decisions: Saving money requires being more mindful of your expenses. It encourages you to make better financial decisions, avoid impulse purchases, and prioritize spending. This discipline can translate to all areas of your financial life, allowing you to create a healthy financial foundation.
• Savings Equals Freedom: Having savings fosters financial independence, as you no longer have to live paycheck to paycheck or rely on credit cards to make ends meet. It can also give you peace of mind and allow you to enjoy life without the stress of financial worries.
• Having a Safety Net During Hardships: Life is filled with unpredictable moments, and having savings can help you weather difficult times. Whether it’s a sudden job loss, a medical emergency, or an unexpected repair expense, saving can provide a buffer and help mitigate the impact of unforeseen events.
• Meeting Life Goals: Saving money can help you achieve your life goals, whether you want to start your own business, move to a new city, or enroll in a postgraduate program. It allows you to seize potential opportunities and pursue your dreams without worrying about financial constraints.
• More Travel Opportunities: By saving money, you can take time out of work to travel, whether it’s for a weekend break or a multi-month backpacking journey. Saving money enables you to indulge in desired experiences without worrying about how you’ll make ends meet later on. It is also imperative to note that the key to achieving financial freedom faster is not only to save but also to invest. While saving money is vital for creating a financial safety net for yourself, investing allows you to grow your wealth and accelerate your path to financial independence.

Why Investing Is Just As Important As Saving

Regarding financial planning, saving money is often emphasized as a crucial step. Yes! Saving is essential; however, regardless of the risk involved in investing, it is equally important and offers a more powerful tool for building wealth and achieving long-term financial goals.

Risk is a very real and very normal inherent element of investment that refers to the potential for financial loss or variability in investment returns. It is the uncertainty that an investment might not do as well as you thought, and you could lose money or get less profit than you hoped for. Every investment holds some level of risk, and understanding and managing this risk is crucial for you as an investor.

Saving and investing may have many differences, but they share some similarities. For instance, they’re both strategies that help you accumulate money. According to Chris Hogan, a financial expert and the author of Retire Inspired, “First and foremost, saving and investing involves putting money away for future reasons.”

By understanding the importance of investing, you can harness its potential and take your financial well-being to new heights. Now, let us explore why investing is just as crucial as saving when pursuing financial independence.

Harness the Power of Compound Returns

This is one of the most compelling reasons to invest. It implies earning returns on the initial investment amount and, at the same time, the accumulated interest over time. By reinvesting earnings, you can generate additional income, which can, in turn, yield more revenue. Commencing your investment journey at an earlier stage allows for a longer duration for compounding to take effect, accelerating your progress toward attaining financial freedom.

Saving vs. Investing

While saving can be likened to storing seeds in a jar for later use, investing is like planting those seeds in the ground. Saving is crucial for building a financial buffer, but investments provide the necessary resources for growth. Investing wisely gives your money the potential to grow and yield a harvest, which will help you achieve long-term financial success.

Capital Gains

Capital gains refer to the profits earned through the sale or disposal of a capital asset. While investment is not considered an asset, it represents the allocation of funds into an asset such as stocks, real estate, or mutual funds, which offers the potential for capital gains. For instance, you purchase a stock for $100 per equity share, and its market price increases to $130. This indicates a capital appreciation of $30 per share. If you decide to sell the stock at this price, you will earn a capital gain of $30 per share.

You are selling assets when their value increases allowing you to generate profits. Suppose you can achieve an average annual rate of return on your investment at 10% or higher. In that case, it is considered a favorable return on investment (ROI) in the stock market.

Capital gains provide a significant opportunity to grow wealth beyond what traditional savings can achieve. You can capitalize on capital gains and accelerate your financial progress by strategically investing in assets with growth potential. However, to determine which assets have growth potential for investment, consider factors such as conducting thorough market research, analyzing historical performance, evaluating financial statements, assessing the industry landscape, etc.

Tax Advantages

Investing can offer various tax advantages that enhance financial outcomes. Retirement accounts like IRAs and 401(k)s provide tax-deferred or tax-free growth, allowing your investments to compound without being hindered by annual taxes. Additionally, certain investments, such as municipal bonds, are debt securities issued by state and local governments to finance public infrastructure projects and other government initiatives.

Purchasing municipal bonds has several benefits. First and foremost, interest income earned from these bonds is usually excluded from federal income tax and, in some situations, state and local taxes. Using these tax advantages, you can optimize your investment returns and preserve more earnings.

FINANCIAL PORTFOLIO

You may have heard the word “portfolio” being thrown around. A financial portfolio is a collection of different financial investments, such as commodities, stocks, bonds, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs) held by an individual or entity. It represents a collection of various investments to achieve specific financial objectives, including capital growth, income generation, and risk mitigation.

While stocks, bonds, and cash are usually considered the main elements of a portfolio, it’s not a strict rule. Portfolios can encompass many assets, including real estate, art, and private investments.

A typical financial portfolio may consist of various assets, including stocks, bonds, ETFs, real estate, physical goods like gold or oil, and cash and cash equivalents. The composition of a personal financial portfolio is influenced by factors such as risk tolerance, investment goals, time horizon, and personal preferences.

It’s important to note that diversification is a fundamental principle in portfolio construction, that is, the idea of not putting all of your eggs in a single basket; it emphasizes the importance of spreading investments across different sectors (e.g., manufacturing, technology, oil, and gas) and asset classes (e.g., stocks and bonds). Diversification helps reduce your risk exposure and aims to help you achieve a balance between risk and potential returns.

WHERE TO STORE YOUR FINANCIAL FUTURE

Often, the process of building wealth is commonly associated with investing. However, a common question is whether investing takes too long to generate wealth. Still, many debates and perspectives exist on how investing can contribute to financial resilience and overall happiness.

It is widely accepted that investing is typically a long-term approach to wealth accumulation. However, the exact time frame varies due to individual circumstances. While investing may not be a get-rich-quick scheme, it holds the potential for significant growth over time.

Building wealth entails careful financial planning and adopting a long-term investment perspective. Although various avenues exist to achieve financial prosperity, investing for the long run remains a fundamental element.

Ways to Save and Invest Money

As we established earlier in this article, saving money provides individuals significant financial leverage, empowering them to fulfill future aspirations and navigate unforeseen circumstances. However, choosing the best savings account to open can be overwhelming due to the many options available.

Still, suppose your goal is to save with minimal risk. In that case, the following five secure options offer you the opportunity to earn interest while preserving your funds.

Savings Accounts

A savings account is one of the popular and straightforward savings options. It is a basic banking product financial institutions offer, allowing individuals to deposit and preserve their funds while earning interest securely.

While savings accounts are a secure and convenient way to store funds, it is essential to note that the interest earned by customers operating on savings accounts is relatively smaller compared to other investment options. Savings accounts are designed for short-term savings and easy access to funds; these deposited funds are, in turn, used by deposit money banks to provide loans and other financial services to their customers, generate revenue for themselves, then pay interest to customers.

Most banks provide insurance coverage for customers’ accounts through the Federal Deposit Insurance Corporation (FDIC). At the same time, credit unions typically offer insurance through the National Credit Union Administration (NCUA). These insurance programs protect your funds, ensuring your savings remain safeguarded during bank or credit union failure.

High-Yield Savings Accounts

These are a type of savings accounts that offer higher interest rates compared to traditional savings accounts. While traditional savings accounts typically provide modest interest rates, high-yield savings accounts aim to provide a more competitive return on your deposited funds. A high-yield savings account can pay account holders up to 10 to 12 times the national average of a standard savings account.

Banks and financial institutions that are often online-based offer these accounts, allowing them to provide better interest rates due to lower operating costs. By choosing a high-yield savings account, you can earn more interest on your savings over time. Here are things to look out for in a high-yield savings account: current interest rate, required initial deposit, minimum balance required, and account charges.

Insured Bank Money Market Accounts (MMAs)

This type of savings account combines the benefits of both traditional savings accounts and investment instruments. MMAs offer individuals a way to save money while earning competitive interest rates. As with other bank accounts, many bank money market accounts are insured by the FDIC.

Certificate of Deposit (CD)

This investment mode is a financial tool offered by banks and credit unions that allows individuals to invest a specific amount of money for a fixed period at a predetermined interest rate. A certificate of deposit is known for its low-risk nature and guaranteed returns, making it popular among conservative investors.

When you purchase a certificate of deposit, you lend money to the issuing institution for the specified duration, known as the CD term. In return, the institution pays you interest on the deposited amount, usually higher than a regular savings account offers. The interest rate on a certificate of deposit remains fixed throughout the term, providing predictability and stability in earnings.

Here’s an example to illustrate how a Certificate of Deposit works: Let’s say you have $4,000 that you want to invest in a CD for a term of 1 year with an interest rate of 2.5%. You approach a bank and purchase a CD with these details. The bank holds your $4,000 for the specified duration. At the end of the year, you receive both your initial investment and the interest earned. In this case, the interest earned on the CD would be calculated as follows:

One important aspect of CDs is that they have a fixed maturity date. This means you will be penalized if you withdraw your funds before the specified time, which was one year in the above example. However, once the CD matures (its time is up!), you can withdraw the total amount or reinvest it into another CD.

Treasury Bills

They are considered safe investment options since the full faith and credit of the government backs them. Investors commonly use Treasury bills to preserve capital and generate a low-risk return. Here’s how treasury bills work:

Issuance: The government issues treasury bills through auctions, typically conducted by the central bank or the treasury department. These auctions determine the T-bills’ face value, maturity date, and interest rate.

Maturity: This is the agreed-upon date on which the investment ends and treasury bills have short-term maturities, spanning from a few days to one year.

Discount Pricing: Treasury bills are issued at a discount to their face value. The difference between the purchase price and the face value represents the interest earned on the investment. For example, suppose you purchase a $1,000 T-bill at a discount price of $990. In that case, the $10 difference is the interest you will earn upon maturity.

Fixed Interest Rate: Treasury bills have a fixed interest rate, discount rate, or yield. This rate is determined at the auction and remains constant throughout the holding period. The interest earned on T-bills differs between the face value and the discounted purchase price.

Short-term debt security: This is a financial instrument that represents a borrowing arrangement between an issuer and an investor for a relatively short duration.

Zero-Coupon: Treasury bills are considered zero-coupon securities because they do not pay periodic interest like other fixed-income investments. Instead, the interest is earned at maturity when the investor receives the total face value.

Liquidity: Treasury bills are highly liquid investments since they can be easily bought and sold in the secondary market. Investors can sell their T-bills before maturity, potentially earning capital gains or losses based on market conditions and interest rate fluctuations.

The T-bill’s effective yield or interest rate can be calculated by dividing the discount amount by the face value and multiplying it by 100. In this example, the effective product would be ($100 / $10,000) x 100 = 1%.

Investors often use treasury bills to park their funds temporarily, especially when seeking low-risk investments during uncertain market conditions. The primary advantages of investing in treasury bills include:

• The high level of safety.
• Ease of purchase and sale.
• The ability to generate a fixed return on investment.

While treasury bills are considered low-risk investments, you may have noticed that they offer relatively low returns compared to other investment options. If you seek higher yields, consider other investment models, such as stocks or high-yield savings accounts!

Roth IRA

An individual retirement account (IRA) is a dedicated savings account designed for retirement purposes. It offers excellent tax benefits, making it a valuable tool for personal retirement planning. With a Roth IRA, you can save funds from your after-tax earnings (the income you receive after deducting applicable taxes from your paycheck). The significant advantage of a Roth IRA is that both your contributions and the revenues generated from those contributions have the potential to grow tax-free. Furthermore, once you reach 59½ and the account has been open for five years or longer, you can withdraw funds from your Roth IRA without incurring taxes. This means that while you are required to pay taxes on the funds you contribute to your Roth IRA, all future withdrawals from the account remain tax-free.

Let’s look at an example to illustrate this: Let’s say you start investing in a Roth IRA at 18 and continue making monthly contributions. We’ll calculate the potential compounding growth over 20 years and then again when you reach the age of 59½, the earliest period for penalty-free withdrawals.

Assumptions:

Monthly Contribution: You invest $200 monthly in your Roth IRA.

Annual Rate of Return: Let’s assume an average annual rate of return of 7% on your investments within the Roth IRA. This is a hypothetical assumption, and actual returns may vary.

Tax Treatment: In this example, contributions to a Roth IRA are made with after-tax income, so we won’t consider taxes on contributions or withdrawals.

Compounding over 20 Years:

 You start investing $200 monthly in your Roth IRA at age 18 and continue doing so for 20 years until age 38. At an average annual rate of return of 7%, let us calculate the future value of your investments. 

Using a compound interest calculator, we find that your monthly contributions of $200, compounded at 7% annually, would grow to approximately $152,066.32 after 20 years. 

Compounding until Age 59.5:

After you turn 38, let's say you decide not to make any additional contributions to your Roth IRA but let your existing investments grow until you reach the age of 59.5. We'll calculate the potential value at that point. 

Assuming no further contributions and an average annual rate of return of 7%, the future value of your Roth IRA, when you turn 59.5, would be $798,431.78. 

It’s important to note that these calculations are based on the assumptions provided and may not reflect actual investment performance. Market fluctuations and individual circumstances can significantly impact investment returns. You can google a compound interest calculator to specify your unique needs!

401(k): A 401(k) plan is a retirement savings plan provided by many American employers; it allows employees to contribute a portion of their pre-tax income to the plan, which is then invested in various investment options, such as stocks, bonds, and mutual funds. The contributions and any investment gains within the 401(k) grow tax-deferred, meaning you only pay taxes once you withdraw the funds during retirement.

In a 401(k), you invest your money, which means you take on the risk of the investments. On the other hand, the employer is responsible for any risks related to providing a pension.

You might wonder why many employers have adopted 401(k) plans over traditional pensions that older generations have enjoyed. Initially, 401(k) plans were designed for something different, but employers have found them to be more beneficial for their businesses. In a 401(k), you contribute your own money. In contrast, in a pension, your employer puts money into a retirement fund for you.

A pension is another type of retirement plan that companies offer, but they have become less popular. It’s like a reward for your years of service. With a pension, you receive regular payments from your employer after you retire. The amount you get depends on how long you worked for the company and how much you earned during your working years.

While both Roth IRAs and 401(k) plans are well-known tax-advantaged retirement savings accounts that facilitate tax-free savings growth, they differ significantly. Understanding these differences can enable you to make informed decisions regarding your retirement planning.

Let us now dive into the distinctions between Roth IRAs and 401(k) plans:

• Eligibility and Account Types: Anyone with earned income such as salary, wages, commissions, and bonuses within specific income limits (determined by their modified adjusted gross income and tax filing status) can contribute or put money into a Roth IRA, while a person’s eligibility for 401(k)depends on their employer’s plan, you can as well talk to your supervisor at your place of employment to know your chances at 401(k).
• Contribution Limits: The annual contribution limits for a Roth IRA and a 401(k) plan differ in their maximum amounts. For 2023, a Roth IRA’s maximum yearly contribution limit is $6,500. However, individuals aged fifty and older can make catch-up contributions, allowing them to contribute up to $7,500 annually. On the other hand, the maximum annual contribution limit for a 401(k) plan is significantly higher. For instance, during 2021 and 2022, individuals could contribute up to $19,500. Similarly, individuals aged fifty and older can make catch-up contributions, allowing them to contribute up to $26,000 annually.

These differing contribution limits highlight the variation in the maximum amounts individuals can contribute to their Roth IRAs and 401(k) plans, providing flexibility based on age and retirement savings goals.

• Tax Treatment: Regarding contributions, Roth IRAs and traditional 401(k) plans differ in tax treatment. For instance, contributions to a Roth IRA are completed with after-tax dollars, meaning you contribute money already subject to taxation. The benefit of this approach is that qualified withdrawals, including earnings, are tax-free during retirement. On the other hand, traditional 401(k) contributions are made with pre-tax dollars. This reduces your taxable income in the contribution year, providing immediate tax advantages. The funds you contribute to your 401(k) grow on a tax-deferred basis over the years. However, it’s important to note that when you withdraw the money in retirement, you must pay taxes on the distributed amount.

INVESTING AND SAVING APPS

In the past, one of the main ways to save money was to use a traditional savings account offered by banks. While this method has been effective and continues to be used, various factors, such as reduced interest rates and multiple charges, have led to the emergence of alternative options.

Historically, many individuals faced challenges accessing investment opportunities due to challenges like discrimination and lack of education based on race, incredible volume, speed of information, finding the right resource offline, and the need for a certain level of start-up funds. However, with technological advancements and the rise of investing and saving apps, it has become much more straightforward to discover investment opportunities online through investment apps.

These savings and investing apps have gained significant popularity in recent years and for a good reason. They have enabled nearly anyone to access the stock market with just a few taps on their phone. Now, let’s explore these remarkable apps together:

Acorn: Acorns is an investment app that has gained significant popularity in recent years, offering a unique approach to investing. It provides a simple, cost-effective passive investing solution well-adapted to new investors. With Acorns, users can easily and comfortably start investing with little money, making it accessible to many individuals. Here are some key features and benefits you stand to gain using the Acorns investment app:

• Micro-investing: Acorns is known for its micro-investing feature, which allows users to invest their spare change. The app automatically rounds their everyday purchases to the nearest dollar and invests the difference. For example, if you spend $4.75 on a cup of coffee, Acorns will round it up to $5 and invest the additional $0.25.
• Automated investing: Acorns offers automated investment portfolios tailored to individual risk preferences. When you sign up, you must answer a few questions to determine your investment goals and risk tolerance. Acorns then builds and manages a diversified portfolio (a mix of different types of investments across various asset classes, industries, and geographic regions) for you, allocating your investments across other asset classes.
• Portfolio options: Acorns provides several portfolios with varying levels of risk, ranging from conservative to aggressive. Each portfolio is constructed using a combination of low-cost exchange-traded funds (ETFs) representing different stocks or/and bonds from diverse sectors. For clarification, Exchange-Traded Funds (ETFs) are investment vehicles regulated by the Securities and Exchange Commission (SEC). They allow individuals to combine their funds into a collective investment fund focusing on stocks, bonds, or other assets. So with Acorn, you can choose a portfolio that alienates your financial goals and risk tolerance.
• Easy setup and accessibility: Getting started with Acorns is straightforward. Users can sign up, link their bank accounts, and invest within minutes. Betterment This is another innovative app. One of which has the highest annual percentage rate (APR). The Annual Percentage Rate (APR) is a benchmark of the cost of borrowing or the return on investment over one year. Since you will mainly be saving and investing with this app, you will need one that offers a higher return.

Betterment: offers excellent low-fee investment management for new investors to high-net-worth clients. It provides its users with comprehensive financial planning.

With its user-friendly interface and emphasis on personalized investing, Betterment has gained popularity among new and experienced investors. I have my Roth IRA running here in this app, and it is easy to manage. Now, let’s take a closer look at what makes Betterment a great investment app:

• Goal-based investing: This app focuses on helping users achieve their financial goals. When you sign up, you can set specific purposes, such as saving for a down payment on a house or retirement. The app then provides tailored investment strategies to align with your goals and time horizon.
• Automated portfolio management: The app uses advanced algorithms and technology to create and manage diversified user portfolios. Based on your risk tolerance and investment goals, the app automatically allocates your funds across a mix of low-cost exchange-traded funds (ETFs). It also intermittently automatically rebalances your portfolio to maintain your desired asset allocation.

SoFi: This investment app offers various financial services to help individuals achieve their financial goals. It is another investment app that stands out with one of the highest annual percentage rates (APR). From investing in stocks and ETFs (exchange-traded funds) to managing retirement accounts and providing a competitive high-yield savings account option, SoFi delivers a comprehensive platform for users to grow their wealth. Here are a few features and benefits of the SoFi investment app:

• Commission-free trading: SoFi allows users to trade stocks and ETFs with zero commissions. This means you can buy and sell investments without incurring additional fees, which can help you maximize your returns.
• Automated investing: It also offers automated investment portfolios called SoFi Invest Portfolios. These portfolios are designed to match your risk tolerance and investment goals. Once you answer a few questions about your financial objectives, SoFi builds and manages a diversified portfolio on your behalf.
• Fractional shares: With SoFi, you can invest in fractional shares of stocks and ETFs. This means you can own a portion of a share, even if the price of a total share is beyond your budget. Fractional shares allow for more flexibility and make investing accessible to a broader range of individuals.