Investments/Saving?

[reptile411]

I am currently putting about 92% of my expendable income into a high interest savings account, 5% into the kids education fund and 2% into stocks. I have heard comments as of late "not on this bord" that this is not a good thing to be doing. I always thought of a savings account as an investment, is it not? I mean my accounts are steadily growing each month. I am making a fairly nice return on my money by the numbers and its so much safer than putting 92% into stocks and 2% into savings isn't it? I have not always done this. When the market was bad I was shorting everything I could every day but it seems to me the market is starting to function the way it was intended to function and you have to be a lot smarter than me now to be able to make a good return on the short side. Any input, suggestions, comments? Should I stop puting my kids 5% in a savings account and put it in a ESA or custodial account that my broker offers?

[Broken Arrow]

Putting money into the bank and earning interest is indeed a form of investing. You are making money with your money.

Now, whether it's the most appropriate form of investing, well that's a different story. But as you have mentioned, that depends on personal risk tolerance, and therefore, asset allocation.

But without touching that right now, yes, earning interest with a savings account is considered as a form of conservative, fixed income investment.

[reptile411]

Well I for sure have no fixed income. I just like to be safe. I know I can make more than 1.5% in the public markets but I an also loose everything very fast.

[disneysteve]

I agree that a savings account is a form of investment. It probably is not the right place for the bulk of your money, however, since the interest rate is very low and doesn't keep up with inflation, meaning you actually lose money each year. For example, if inflation is 3% and your account earns 1.5% (and is taxable), your net return is actually a negative number.

[swanson719]

I disagree that money in savings is an investment, for the reason that Steve said, you lose money on your so called investment when inflation is higher than your interest rate. Generally, it's going to be a wash in the long term.

If you're nervous about losing your money, look into a good money market mutual fund. Or go with long term, established mutual funds. DW and I are actually up about 12% in the last 12 months, following Dave Ramsey's investment style, with a good broker.

As far as the kids are concerned, put it into a good ESA that's in growth stock mutual funds. You can only put $2,000 a year per kid in these, and it will cover a state school, not ivy league. If you've got bigger aspirations, have the kid get a job, and then you can open a Roth in their name and fund it up to 100% of the income they made. I.E - you pay the kid the money out of pocket. You then can withdraw all of the principal when they reach college age. By doing this, you're essentially using it as a savings account, but giving yourself the possibility of a much higher interest rate.

[Broken Arrow]

Well, the risk and loss of value against inflation in itself does not disqualify something like a savings account from being a form of investment. Perhaps one can argue that it's not much of an investment, but it's a form of investment nonetheless.

Especially at this point in time, I think it's wise to look over our portfolios and make sure that we are taking some action to cover ourselves against inflation. Whether it means taking a greater stake in equity (if you're aggressive) or putting a 10% or more allocation in direct inflation hedge such as TIPS (if you're conservative), I think it's something we should all consider....

[maat55]

A good rule of thumb would be to keep any funds that will be needed in less than five years in your high yield savings.

Any funds you will need in 5 to 10 years, could be put into large cap, blue chip type stock mutual funds

Funds not needed for more than 10 years can be invested in small cap more aggressive stock mutual funds.

[tmvijai]

Originally Posted by Broken Arrow

Well, the risk and loss of value against inflation in itself does not disqualify something like a savings account from being a form of investment. Perhaps one can argue that it's not much of an investment, but it's a form of investment nonetheless.

I don't really agree that saving is investing. You can say theoritically but doesn't make practical sense. Saving is basically about trying to keep your money safe or preserve your capital with added advantage of interest to beat inflation if possible. THere is no risk involved in it. Your money going to safe and you won't lose it. But investing is totally risky business. You money has many chances of losing its value when the underlying equity loses its value. So I really don't agree saving has form of investment.

Investing vs. saving — ABCs of investing

[Broken Arrow]

I don't really agree that saving is investing. You can say theoritically but doesn't make practical sense. Saving is basically about trying to keep your money safe or preserve your capital with added advantage of interest to beat inflation if possible. THere is no risk involved in it. Your money going to safe and you won't lose it. But investing is totally risky business. You money has many chances of losing its value when the underlying equity loses its value. So I really don't agree saving has form of investment.

Well, ultimately, I don't think it's a big deal whether we agree or disagree. A savings account is still going to be a savings account.

But since it's brought up, I contend that it is indeed a form of investing, and perhaps it would help to see it relative to other types of investments that are out there.

For example, buying bonds are typically considered as a form of investing. However, what is it that we are doing here? We're lending money out, in return for a promised form of interest, right? At the same time, we are also preserving our capital (generally).

When you think about it, the same is true with CDs-- which most I think would also agree is a form of investing-- except this time, you're lending it to a banking institution rather than a company or government. Again, fixed interest and capital preservation.

However, this also happens with a savings account. You're also getting some interest as well as capital preservation. Sure, the interest rate is typically lower, but it's typically balanced out with the advantage of having liquidity.

And yes, most people don't see it as a form of investing because... well, I'm not sure why. I think it's because people see it as only as a place to park their money until they can find a better form of investment for it. Then again, my own credit union is offering me 4% APY right now! That's better than most CDs and many bonds out there. Plus liquidity! So, why not use it as a form of investing?

Yes, the concept of saving and investing doesn't always mean the same thing (even when the two overlap). Pragmatically speaking, however, that does not mean a bank savings account can not be used as a form of investing. And if it is used as such, then it is indeed a form of investing.

Also, please understand that even saving money in a bank savings account has its own forms of risk. So, I'm sorry, but I must also disagree with the definition provided in that link. If a bank saving is without risk, then FDIC does not need to exist. But its does, and for good reasons. Also, bottom line, I'm earning 4% APY through my own bank account. Agree or disagree, that's money in the bank. Literally.

[disneysteve]

Originally Posted by tmvijai

I don't really agree that saving is investing. You can say theoritically but doesn't make practical sense. Saving is basically about trying to keep your money safe or preserve your capital with added advantage of interest to beat inflation if possible. THere is no risk involved in it.

This is all academic, of course, but you actually make a good point. An investment is something you do with the expectation of profit. That's exactly why I always say a house is not an investment. I didn't buy my house in order to make a profit. I bought it to have a place to live.

By the same logic, a savings account paying 1% before taxes really isn't an investment either. I don't put money in an account like that with the expectation of profit. I put it there for it to be safe and readily available as needed. For that matter, I put money in my checking account regularly and that pays no interest at all, so that is savings but certainly isn't an investment.

ETA: I forgot to address the last sentence I quoted. There is absolutely risk associated with a savings account. There is inflation risk, the risk that your money will fail to keep pace with inflation and thus give you a negative return in real dollars.

[tmvijai]

Originally Posted by Broken Arrow

Pragmatically speaking, however, that does not mean a bank savings account can not be used as a form of investing. And if it is used as such, then it is indeed a form of investing.

Also, please understand that even saving money in a bank savings account has its own forms of risk. So, I'm sorry, but I must also disagree with the definition provided in that link. If a bank saving is without risk, then FDIC does not need to exist. But its does, and for good reasons. Also, bottom line, I'm earning 4% APY through my own bank account. Agree or disagree, that's money in the bank. Literally.

I understand what you are trying to say. I concur. It surely can be used for investing but its not really an investing vehicle. I do take my CC balance transfer for 0% and put in CD to get free interest money. So it is one way of investing. I don't deny that but it not a true investing vehicle.

You said banking also has risk associate with it. Yeah but its that risk is different than investment risk. Banking risk more towards bank going under whereas the investment risk when the company invested goes under and volatile all the time.

As you said, if I can earn a good return who cares whether bank is a investing or savings..

[david4353]

I would definitely stay out of the Stock market with all which concerns my pension. I personally saw my neighbor grinding his money to smithereens when the great fall happened last august.

I know people are saying that it’s now an up market, but one should only put there “fun money”.

[disneysteve]

Originally Posted by david4353

I would definitely stay out of the Stock market with all which concerns my pension. I personally saw my neighbor grinding his money to smithereens when the great fall happened last august.

I know people are saying that it’s now an up market, but one should only put there “fun money”.

I think you'll find that the vast majority of folks here and elsewhere disagree with you. The stock market is a long-term investment. It is for money that you won't need for 10, 20, 30 years. It is not the place to put your house downpayment or your new car fund or your teen's college money, but you will likely never be able to afford retirement without investing in the market unless you have a great and solid pension plan.

[Broken Arrow]

Originally Posted by tmvijai

I understand what you are trying to say. I concur. It surely can be used for investing but its not really an investing vehicle. I do take my CC balance transfer for 0% and put in CD to get free interest money. So it is one way of investing. I don't deny that but it not a true investing vehicle.

You said banking also has risk associate with it. Yeah but its that risk is different than investment risk. Banking risk more towards bank going under whereas the investment risk when the company invested goes under and volatile all the time.

Um... I know I am opinionated guy. I know I am hard-headed. And I think we ultimately agree more than we disagree, and will probably have to agree to disagree with the rest.

But to be clear, you did say that it "didn't make practical sense", which I've only tried to illustrate that it does. And you did say that "there was no risk involved in it", which I was only trying to illustrate that it does. I'm not trying to be pain in the butt or anything, only that I was trying to answer these direct criticisms.

Honestly, depositing money in a savings account is no different in some ways than buying a CD. You're still lending the bank money, you're still promised a fixed interest in return, and you're still maintaining capital preservation. About the only pragmatic difference between the two is liquidity, and why should that be the determining factor in terms of what constitutes as an investment and what does not?

So, then, what seems to be the problem? I think it's a matter of perception, and I think it's unfortunate. Sure, maybe most people only see it as putting money in the bank to save it somehow... and yet, banks don't keep that money in their vault. They loan it back out, with leverage and a higher interest rate. That's also why, no matter how low the risk, there is a chance that banks can go under from it (and thus, the need for FDIC).

So, perception aside, we are indeed investing. That's the honest truth. It's just not how we end users typically look at it....

But anyways, this really isn't a big deal, so I won't harp on it anymore after this.

[reptile411]

Originally Posted by disneysteve

This is all academic, of course, but you actually make a good point. An investment is something you do with the expectation of profit. That's exactly why I always say a house is not an investment. I didn't buy my house in order to make a profit. I bought it to have a place to live.

By the same logic, a savings account paying 1% before taxes really isn't an investment either. I don't put money in an account like that with the expectation of profit. I put it there for it to be safe and readily available as needed. For that matter, I put money in my checking account regularly and that pays no interest at all, so that is savings but certainly isn't an investment.

ETA: I forgot to address the last sentence I quoted. There is absolutely risk associated with a savings account. There is inflation risk, the risk that your money will fail to keep pace with inflation and thus give you a negative return in real dollars.

I put money in saving and expect a return on my money. So according to your theory that makes it an investment, otherwise I would keep it all in my checking account but this is not really of a concern. I feel my money while giving me a nice profit is much much safer than in the market right now. Especially today good lord it was a bad day

[reptile411]

Originally Posted by david4353

I would definitely stay out of the Stock market with all which concerns my pension. I personally saw my neighbor grinding his money to smithereens when the great fall happened last august.

I know people are saying that it’s now an up market, but one should only put there “fun money”.

I watched my stocks loose %60 and my 401K lose about 40% before I jumped on it to stop the losses. Now my 401K is only down about 6% now and my stocks only about 10% so I know exactly what the downfall of the market has done which is why I dump all my money into savings with the exception of my JNJ investment which I am still contributing to.

[reptile411]

Originally Posted by disneysteve

I think you'll find that the vast majority of folks here and elsewhere disagree with you. The stock market is a long-term investment. It is for money that you won't need for 10, 20, 30 years. It is not the place to put your house downpayment or your new car fund or your teen's college money, but you will likely never be able to afford retirement without investing in the market unless you have a great and solid pension plan.

I agree and disagree. I have many long term investments but also at the same time with all the market volatility we have seen I have been day trading a lot up until recently when the market started coming back up and I have made out fairly well in the short term but this is just fun money. The real investments are there for the long term.

[tmvijai]

Originally Posted by Broken Arrow

So, then, what seems to be the problem? I think it's a matter of perception, and I think it's unfortunate. So, perception aside, we are indeed investing. That's the honest truth. It's just not how we end users typically look at it....

But anyways, this really isn't a big deal, so I won't harp on it anymore after this.

Hey BK, I am still not in agreement that its a true investment vehicle to spread the wrong impression to others. It is a place holder for money. I understand bank is going to use your money and loan it back. Thats their business and its economic cycle. Thats how it works. As you agreed, its the liquidity and risk factor which differentiates them. You have to draw a line and these factors help you to draw it. Thats all. I rest my case.

It all the matter perception.. changes all the time depending on people.

[disneysteve]

Originally Posted by tmvijai

Hey BK, I am still not in agreement that its a true investment vehicle

If it pays interest, it is an investment. It may or may not be a very good one and it may or may not be an appropriate place to put your money depending on your situation, but it is an investment.

[Goldy1]

The problem is that you don't always know when you will need the cash. Will it be 5 years or 10 years? Well how is my roof going to hold up? WEll, is a pink slip around te way? You don't quite know. You have to plan for a job hunt taking longer etc. and if ytou are really cautious, you willl need a lot of liquid cash.
I moved some money into my roth and keep it in something like a money market fund so I don't have to pay taxes on the interest which I did in the bank. I could only put the max allowed though which was only a fraction of my account. I want the money out of stocks in case I need it, but I probably won't need it soon so it is there tax deferred for now.