Beyond Mattress Stuffing: What To Do With Your Savings
NEW YORK ( MainStreet) Interest rates are creeping up a bit but still remain painfully low for investors. You want to save money for retirement, but you want to do it the right way. How much should you have in your savings account? What do you do after that? We spoke to a number of investment and retirement planning experts to provide you with a range of options on how you can prudently park your money in places other than a savings account.
First Things First
Before you start with anything else in this article, experts agree: you should max out any contribution that you're making to a matching 401(k) program and have between four and six months worth of emergency saving socked away. After all, a savings account has one very attractive feature: you can pull it out whenever you want without a penalty.
Using CDs the Right Way
Certificates of deposit (CDs) don't offer interest rates that are fabulous. When used properly, however, points out David Mazzetti, a certified retirement and financial planner with Ameriprise, they can provide a semi-liquid source of funds at more attractive interest rates than a traditional savings account. It's called laddering, and it works like this: you stagger your CD purchases so that they're maturing once every year or once every six months. "This allows you access to longer-term rates, while also providing some liquidity," he explains.
Investing Wisely in the Market
Elle Kaplan, CEO and Founding Partner of Lexion Capital Management, LLC is very direct: "Anything beyond six to eight months of real living expenses in a savings account is modern-day mattress stuffing." She also has a very simple answer about how to save. "Any money you don't need for three years should be invested, and it should be invested in the stock market."
Isn't that a bit risky? "The risk is in not investing," she says, adding that, "the stock market goes up 8% to 10% over the long term. A little bit can compound a lot over a long period of time." For the regular, 9-to-5 worker who is investing, heading down to the local discount brokerage firm and investing in low-cost, diversified exchange-traded funds is the answer.
She further urges people to set aside money for this purpose automatically. "Set it and forget it," she says. "Making decisions on a paycheck-by-paycheck basis allows for too many chances to make excuses to not save."
The S&P 500
Rather than investing in segments of the stock market, why not invest in the biggest companies on the market? That's a suggestion from Casey Mervine, vice president and financial consultant with Schwab in Torrance, Calif. It's not without risks; for example, you might be inadvertently investing in the next Lehmann Brothers, AGL or Enron. On the other hand, you might also be holding a piece of the next Apple.