What Is The Best Place For My Savings To Grow?
Posted: February 26th, 2010 | Author: Joe | Filed under: Investing, Saving | Tags: Building Wealth, Investing, Saving | 2 Comments »I recently got a question in an email and thought I’d make it a post, since it’s a pretty general question and suits this blog topic well.
Here’s the question:
I have a couple thousand dollars saved up, but it’s just sitting in a bank account right now not earning very much. I see a lot of sites like yours recommending ING high yield savings, but that yield is only 1.15%. I’m wondering what will give me the best return on my savings for both the long and short term?
-John.
Well, there is no single answer. There’s nothing that will give you the most return both short and long term. If there was, all other investments would be rendered useless. In fact, return is based on risk, and since not all places to put your money carry the same risk, not all places offer the same reward.
In general, the highest return for the long term is stocks, followed by bonds, followed by CDs and bank savings accounts. But I think John is asking the wrong question, or maybe he’s just skipping ahead. What John really needs to ask himself is: How much risk can I take?
Anyone can find a chart or set of data to show that one savings vehicle or investment class beats another over some given period of time. But what does that really tell you?
For example, stocks lost value over the last 5 years while gold almost tripled. But that doesn’t mean you should put your savings in gold alone. Gold did almost nothing for the 20 between 1981-2001.
The best place to put your savings is determined by the amount of risk you can take, and that is largely dependent upon when you need the money.
If you’re saving for retirement and that’s 20 years or more away, then a mix of stocks and bonds is probably best since they provide the greatest average growth over that time period and can usually out pace inflation. But stocks are risky, as we’ve seen during the 2008-2009 crash. Cash and gold were about the only things that didn’t lose value.
But you wouldn’t want to keep your retirement savings in cash because over 20 years, you’d likely lose money to inflation and end up with less real value than you could have.
But that’s savings, not growth.
If you’re saving money for retirement or college and that event is 15 years or more away, stocks and bonds are the way to go because you need your money to grow over that time, and savings accounts won’t get the job done.
If you’re saving for a down payment on a house, or a new car then you’re better off with a high yield savings account or CDs. You’re giving up growth and accepting a lower return because you’re saving your money for a specific near term goal.
In the long run, growth is more important than preservation of capital (savings). But when your goals switch from long to short term then preservation is key.
my ex father in law (now deceased) saved $16,000 for my son’s education. My ex husband is incarcerated but has tried to stay involved in our kids’ lives. he has written out a plan for the 4 years of my son’s college expenses and it involved taking a little out for the first year, and saving the rest to be used each August (or whenever) for the 3 years of college. On his chart, he shows a rate of 15% interest gain on the remaining amount. where in the world did he find 15% ? (keep in mind, his plan is for me to dip into the fund each August.
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