Paul Greenhalgh highlights the common errors that many of us make when allocating our savings.
One of the strangest things about people is we all like to save, but few of us really consider the real meaning of saving, or apply what it means in our daily lives. For example, everyone learns to save a few pence or pounds here and there, but almost no one considers how much those savings might actually cost them each year.
In truth, after you’ve factored in the rate of inflation and the opportunity cost, all but the most well thought out savings schemes cost more than they will ever save. We aren’t taught to think of those things though. Instead, we focus much more on how much we save, rarely considering the real cost of what we’re spending or losing through poorly performing savings. We happily pay interest on our jeans, and are misled into believing that credit cards and credit are a way of life.
It’s time to wake up and smell the coffee, be one of the few people who wakes up to the trick and make some changes to put the cards back into your own hands. Read on to learn more about 5 behaviours that will actually help save your money.
1) Don’t keep your money in the bank.
Okay, it’s a necessity to bank. We need it for our paychecks to come in and to pay our bills. You should of course choose the highest rewarding current account to do this. The latest trends in 5% interest accounts are great – but they’re taxed and they’re capped at around £2000 meaning that you won’t be able to make more than £7 per month even if you kept them maxed out.
But when it comes to making some real savings, there is only one place in the world that’s worse to save money than the bank – under your mattress.
Banks will rarely give you an uncapped interest rate that exceeds the inflation rate. In fact, the interest the banks make on your money is what lets them pay millions in bonuses to their staff each year, while also hiring the best marketing firms to convince you to put your money in the bank in the first place. It’s a bad idea. After accounting for lost interest, compounding, inflation, more often than not you’ll lose more money in a bank savings account than you will ever actually save.
2) Save only what you need to survive in the event of a crisis.
Any savings you don’t actually need to survive on is wasted money. It could be invested anywhere else, and working for you – earning more than it will in any savings account. Because of this, it’s a very bad idea to keep too much money tied up in short-term savings.
If you have long-term assets that you can liquidate in 30 to 60 days, you don’t generally need more than 90 days of liquidity in your savings. Having more than this wastes money. For example, an extra £10,000 saved at a 2% return could be invested in something with a 12% return. That means you’d be losing about £1,000 a year in value for your money if you had it in a lower preforming but more easily accessed fund.
3) Don’t trade in Forex unless you really know what you’re doing.
Some may argue that this is bad advice, but to a novice trader, Forex is just like the poker room in a casino. Your worst enemy will always be yourself. No one else playing will tell you that though, because if you leave the table, that’s one less fish for the sharks to dine on. The only way to work around this is to have a very solid understanding of how the game is played, a firm grasp of what you stand to gain or lose, with the instincts and experience to know when it’s time to quit. If you don’t know how Forex is played, you will lose, making it a very bad place to invest or use to start any savings.
4) Hold on to any stocks you have unless they are really bad.
Far too many people believe in trading their stocks monthly or even more often. While this may be ideal for those who have the experience and background to judge when some stocks should be traded up or down, as a general rule, it’s a bad idea. If you’re a novice, most companies worth considering for your investment will see growth year in and year out.
While there will be ups and downs, it’s important to look at the big picture in terms of where the company and your investment are headed. Three great examples of this are Apple, Google, and Microsoft. All of them have seen long-term growth of their stocks, despite the occasional ups and downs. Anyone who sold their early investments is quite likely looking back and kicking themselves. If you get a decent stock, hold on to it.
5) Carefully monitor real estate investments.
There is a common and technically incorrect statement about real estate, in that there isn’t any more of it being made, and that it will always go up. While these facts are true, anyone with real experiences in flipping properties can tell you that they are not really applicable to markets, provided you pay attention.
In fact, property markets have been up and down enough in the last ten years that anyone even casually observing the trends should quickly see where there was a relatively high point, allowing overvalued real estate to be sold at absurdly high prices. Then there was a drop again, where you wouldn’t have wanted to sell, but buying was something worth considering. Managing the buy and sell times of real estate, coupled with identifying population trends in up and coming neighbourhoods, can turn a small investment into a fortune, but only if you pay attention to it and act wisely.
It’s time to be smart about savings…
Asset allocation requires a small amount of your time and will provide fantastic results in the long-term. Too many of us fail to consider the passive losses our savings cost us. Over time, these passive losses add up, and can cripple your finances. Avoid the common errors detailed above to ensure your hard earned savings are working equally hard for you in your sleep!