Money Lesson #4: Choosing the Right Tool for the Job

In the previous lesson with my wife, I taught her about various investment vehicles available at our disposal. This time we discussed choosing the right tool for the job; that is, choosing the best investment option available for various savings goals.
Tools
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Common Savings Goals

First, we reviewed some of the more common savings goals. I purposefully excluded other financial goals, such as debt elimination, from this list.

Obviously, these warrant different investment strategies, vehicles, and tools to get the job done.

Saving Money for Retirement

This type of saving requires long-term approach using high growth potential investments such as stocks, bonds, REIT, ETFs, and Mutual Funds. For us, the best tools for the job are 401k and Roth IRA.

Saving Money for College

This is something that we went through recently, and as you know, we started a 529 College Savings Plan for our son not too long ago. Similar to retirement, this type of saving requires long-term approach using high to moderate growth investments such as stocks, bonds, REIT, ETFs, and Mutual Funds. For us, the best tools for the job are 529 Plan and Coverdell Education Savings Account.

Saving Money for Emergencies

This type of saving requires high liquidity (you can get the money quickly and easily) using low-risk investments such as high yield savings account, high yield money market account, short-term CD, and short-term Treasury securities (e.g., T-bill).

We have a portion of our emergency fund in our normal banking account (through a traditional financial institution, like Citibank and Chase) and another portion in our brokerage account (through a discount brokerage firm, like TD Ameritrade and Charles Schwab). However, I don’t like the idea of keeping all of our emergency fund in a low growth account, so I took a calculated risk and invested a portion of it in riskier investments.

Saving Money for Down Payments

This is similar to saving money for emergencies, especially if it’s saving money for a house. The time horizon is normally around 2-5 years and the goal is to grow the money at moderate pace while protecting the capital from any kind of drastic loss. As such, I would take same investment approach as I would for emergency saving.

However, I must admit that when I was saving money for our house, I couldn’t resist the temptation and invested some money in the stock market anyway. Luckily, I didn’t take any big hit before I purchased the house. Otherwise, the possibility of owning a home could have gone up in smoke; especially the way the New York housing market took off in late 90s and early 2000s.

Well, that was all we discussed this time around. Now let me ask you: Are you using the right tool for the job?

Other lessons:

This article was featured in the Festival of Under 30 Finances! Halloween edition hosted by How to Make a Million Dollars.

Pinyo
Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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1 Comments

  1. gravatar
    Make Friends, Earn Money
    May 3, 2008, 12:21

    Pinyo, this is an excellent indepth look at the various savings tools and their relevance to individual circumstances. High liquidity saving options are always best for emergency funds.

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