What is the best way to invest your savings?

Americans are lousy savers. Today, Americans, on average are saving a little over 5 percent a year. It wasn’t always this low.

Household Saving Rate in the United States increased to 5.40 percent in February from 5.20 percent in January of 2016. Personal Savings in the United States averaged 8.35 percent from 1959 until 2016, reaching an all time high of 17 percent in May of 1975 and a record low of 1.90 percent in July of 2005. Personal Savings in the United States is reported by the U.S. Bureau of Economic Analysis.

source: tradingeconomics.com

That little spike up above 10 percent around 2013 was due to the financial and housing crises in 2008 and 2009. Back then, many people lost their jobs and lost their homes. Those who were fortunate enough to maintain both their jobs and their homes were able able to save money. The spike in savings was likely due to fear after people saw their friends, family members, neighbors, and acquaintances  losing their jobs.

When people feel good about the economy, they tend to spend money; when people are nervous about the future, they tend to save their money.

Build an Emergency Fund
Whether you are feeling good about the economy or not, you should be saving and investing money. Ideally everyone should have between two and six months worth of cash on hand for an emergency. The perfect example would be when you lose your job. If you have an emergency fund, you can use that money to continue paying your bills while you are looking for a new job.

You can be a millionaire
Once you have amassed a reasonable emergency fund, you should invest your savings. I suggest that your goal is to invest at least 15 percent of your money into the stock market. The later your start saving and investing for your future, the more you should put away. Those who start early are lucky. They are afforded the luxury of compounding. Over a short period of time, it’s difficult to determine and anticipate the gyrations of the stock market. Some years are up, others are down. It’s tough to guess the near term direct, but the long term direction is easy. Over the long term, your investments in the stock market are likely going to increase. Over the years and decades, your money will grow. On average, the S&P 500 has returned 8.5 percent. If you invest just $3,000 each and every year in an S&P 500 index fund, after 40 years, you will have almost $1,000,000.

Start each day off right
While $3,000 might sound like a lot to many folks, it’s not all that much; over a year’s time, you are probably spending almost that much on your morning coffee. It really pays to save. You can do this. Simply set aside $10 every day. Put it in an envelope and don’t touch it. Do this every day. Learn to save. Each morning before you leave the house to go to work, simply take a ten dollar bill out of your wallet or purse and put it in the envelope. At the end of the year, you will have $3,650 (ten dollars more on leap years.) At the end of the year, take that $3,000+ and invest it an your broker of choice. There are many inexpensive brokers to chose from (i.e. Vanguard, Fidelity, Schwab, TD Ameritrade.) Invest the money in an S&P 500 index fund; all of these brokers offer their own version of such funds and they won’t charge you any commissions to invest this money. Then, and this is really the hard part, ignore the money. Don’t think about it. Don’t touch it. Don’t try to time when you are going to invest it. Simply invest it and forget about it. Decades later, when it is time to retire, you will be happy. You will have hundreds of thousands of dollars. The more you invest, the more you will have.
Why invest in a passive S&P 500 index fund? Most of us don’t have the time, the skills, or the inclination to closely monitor our investments. Investing in a broad-based S&P 500 index fund will enable you to invest in 500 of the largest companies in the USA. This investment will allow to you capture the market’s average returns. While many might think that just doing average isn’t good enough. Remember this, 85 percent of professional money managers under-perform the stock market averages. If the pros can’t beat the market averages, you likely can’t either. Just accept that and you will rest easier.

One third of retirees today have no money when they retire. Take your $10 bill, invest it every day and you will likely be a millionaire when you retire.

Photo credit: stevendepolo

Photo credit: 401(K) 2013

Photo credit: 401(K) 2013

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