August 4, 2015

With recent news articles about the Euro, downturns in the Chinese stock market and potential inflation, many clients are nervous about their portfolios. Now is a great time to take an objective look at some common myths about saving money.

Myth #1 – Cash is safe

Reality check:  Money market, savings accounts, T-bills, and cash under the mattress are all considered cash equivalents. These are great vehicles for short-term investments or emergency accounts but they are not the best vehicles for long-term investments. Why? It’s because inflation is working against you, and you may have negative returns after taxes and inflation. Also, many people make the mistake of thinking that retirement is a finish line and they need to get very conservative with their investments at this time. Many folks need to remember that they may spend several decades in retirement and may need some stock and/or other forms of growth in their portfolio to combat inflation.

Myth #2 – The stock market is dangerous

Reality check:  Investment vehicles are rarely evil or saintly. What really matters is using the most appropriate tools for your situation. Market risk is the chance of the value of your investments going up or down with the market. There are several other types of risk, such as inflation (or purchasing power), reinvestment (the ability to reinvest your bonds at the same interest rate), industry risk, business risk, etc. It’s important to understand why you are saving and to match the investments to the time horizon and nature of your goal. For instance, if you plan on buying a car in one year, then you probably shouldn’t invest your “car-placement savings” in the stock market because markets fluctuate widely in the short-term. However, if you have a longer-term goal, you may need to take market risk in order to combat inflation.

Myth #3 – Always maximize your retirement account contributions first

Reality check:  Most people have more than one financial goal, and many times those goals conflict. You may want to buy a house in the short term, pay for a child’s college education in the next 10 years, and then retire 20 years from now. It’s important to map out the timing and the funding need of each goal so you save appropriately in the right types of vehicles. For example, if you know you are buying a house within the next two years, it may make sense to have some of your savings go towards a taxable account so you can have a smaller mortgage. It’s okay to increase or decrease the amount you’re saving in different vehicles so that you are optimizing your future distributions. The last thing you want is to pay extra taxes and penalties on money that could have been saved a different way.

What are some of the myths you’ve encountered when it comes to saving money?

© Clark Nuber PS and Developing News, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.