Savvy Savings: Allocating Your Money Wisely

Allocating your savings and investments is an important step in achieving your financial goals. It involves dividing your money across different buckets to balance risk and reward, maximising returns, and minimising losses. The first step is to define your short-term and long-term goals, such as buying a house, saving for retirement, or paying off debt. Next, you should prioritise these goals based on their importance to you and your family. This will help you determine how much money you need to set aside for each goal and how much time you have to save. It's crucial to start investing as early as possible, rather than waiting for the right time. The type of investments you choose will depend on your risk tolerance, time horizon, and financial situation. Diversification is key, both across different asset classes and within each bucket, to reduce risk and increase returns. Regularly reviewing and rebalancing your portfolio is essential to ensure it aligns with your target allocation and risk tolerance.

Automate your savings

Automating your savings is a great way to save money without having to think too much about it. It's a "set it and forget it" approach that can help you build your savings effortlessly. Here are some detailed steps to help you automate your savings:

Determine the Amount and Frequency:

First, decide on the amount you want to save and how often you want to save it. This could be a fixed amount or a percentage of your paycheck. Consider your income, expenses, and financial goals when determining the amount and frequency of your savings.

Choose Your Banks:

You can choose to keep your checking and savings accounts at the same bank, which may make the process easier. Alternatively, you can opt for a different bank that offers higher interest rates or lower fees for your savings account.

Set Up the Transfer:

Link your savings account to your checking account to enable automatic, recurring transfers. You can also arrange for a portion of your paycheck to be directly deposited into your savings account. This can often be set up through your employer, especially if they offer direct deposit.

Monitor Your Progress:

Even though your savings plan is automated, it's important to regularly check in on your finances. This helps you stay on track with your financial goals and make any necessary adjustments.

Use Savings Apps:

There are many third-party apps available, such as Oportun (formerly Digit), Acorns, and Qapital, that can help you automate your savings. These apps offer features like automatic transfers, savings goals, budgeting tools, and investment options.

Take Advantage of Round-Up Apps:

Some apps and financial institutions offer round-up features, where they round up your purchases to the nearest dollar and transfer the spare change to your savings account. This can be a great way to boost your savings without noticing a significant impact on your spending.

Automating your savings is a powerful tool to help you stay consistent with your financial goals. It removes the mental barrier of manually transferring funds and reduces the temptation to spend the money instead. By following these steps, you can make saving money a seamless and stress-free part of your financial routine.

Set up an emergency fund

Setting up an emergency fund is one of the first steps you can take to start saving. It is a safety net that helps you prepare for unexpected financial emergencies, such as car repairs, home repairs, medical bills, or a loss of income. Here are some detailed and direct instructions to help you set up an emergency fund:

Understand the purpose of an emergency fund:

Know that an emergency fund is a dedicated savings account specifically for unplanned expenses. It is a financial buffer that provides security and peace of mind during challenging times.

Determine the amount you need to save:

The general rule of thumb is to save enough to cover at least three to six months' worth of living expenses. This amount can vary depending on your financial situation and job security. For example, freelancers or seasonal workers might need a larger emergency fund.

Set clear goals:

Calculate the total amount you want to save and break it down into manageable milestones. For instance, your initial goal could be to save $500 to cover an important bill, and then gradually work towards the three to six months' worth of expenses.

Make a savings plan:

Figure out how much you can set aside regularly and create a system to contribute to your emergency fund consistently. You can set up automatic recurring transfers from your checking account to your savings account or put aside a specific amount each week or payday.

Choose the right account for your emergency fund:

Select a safe and accessible place for your emergency fund. A high-yield savings account is a good option as it offers easy access to your money and earns interest. Alternatively, you can consider cash investments or a prepaid card. Ensure that your emergency fund is separate from your daily spending account to avoid temptation.

Stay disciplined and monitor your progress:

Regularly check your savings account balance and celebrate your successes. If you find yourself struggling to save, assess your spending habits and make adjustments. Remember, building an emergency fund is a gradual process, and even small contributions can make a significant difference over time.

Prioritise your goals

Setting financial goals and prioritising them is a crucial step in achieving your objectives. Here are some steps to help you prioritise your goals:

Make a list of your financial goals

Start by listing all your short-term and long-term goals. Short-term goals may include buying a car, paying for a wedding or vacation, or home repairs. Long-term goals may include getting out of debt, saving for retirement, or buying a vacation home. Narrow down your list to approximately five goals.

Rank your goals

Assign a rank to each of your financial goals. Consider the pros and cons of each item, as well as the opportunity cost of choosing one goal over another. For example, saving for your child's education may take priority over saving for a new car.

Create an emergency fund

Before you begin saving for other goals, ensure you have an emergency fund in place. Without it, unexpected expenses such as car repairs or medical bills could force you into debt and derail your plans. Aim to save at least three months' worth of expenses and work towards having six to nine months' worth for added security. Keep this fund in an easily accessible savings account.

Pay off high-interest debt

Focus on clearing any high-interest debt, such as credit card balances. The interest accumulated on these debts may outweigh the returns you could earn by investing your money. By paying off these debts first, you'll save more in the long run.

Save for short-term goals

Short-term goals typically fall within a one- to five-year time frame. Determine a specific savings target and set aside a certain amount each month to work towards it. Examples of short-term savings goals include a wedding or a vacation fund.

Choose suitable savings plans

Different types of savings plans are available, depending on your time frame and financial circumstances. For short-term goals, consider low-risk options such as online savings accounts, certificates of deposit (CDs), or money market accounts. For medium-term goals, you may opt for a mix of these options or explore laddering CDs. For long-term goals, investing in the stock market may be suitable, as you have more time to recover from market fluctuations.

Diversify your investments

Diversifying your investments is a crucial aspect of financial planning, and there are several strategies you can employ to achieve this. Here are some detailed tips to help you diversify your portfolio:

Spread Your Investments

When diversifying, it's important to allocate your money across various industries, sectors, and asset classes. Avoid putting all your investments in one sector, even if it's performing well. Diversify into other sectors with growth potential, such as education technology or information technology. You can also explore different types of investments, including stocks, bonds, commodities, exchange-traded funds (ETFs), and real estate investment trusts (REITs).

Balance Stocks and Bonds

Stocks and bonds are the two primary types of investments. Stocks are typically high-risk, high-return investments, while bonds are more stable with lower returns. To minimise risk, divide your funds between these two options. A common rule of thumb is to subtract your age from 100 and invest that percentage in stocks, with the remainder in bonds. For example, a 30-year-old might allocate 70% to stocks and 30% to bonds.

Consider Index and Bond Funds

Index funds, such as ETFs, and mutual funds that track broad indexes like the S&P 500, offer an easy and low-cost way to build a diversified portfolio. These funds allow you to invest in a variety of companies and industries without having to build a portfolio from scratch.

Don't Forget Cash

Cash is often overlooked, but it can be a valuable part of your portfolio. While cash is likely to lose value over time due to inflation, it can provide protection during market downturns and give you the flexibility to take advantage of future investment opportunities.

Periodic Rebalancing

Over time, the performance of your investments will cause shifts in your portfolio's composition. To maintain diversification, it's important to periodically rebalance your portfolio. This involves adjusting your investments back to your target allocation. For example, if your stocks have grown significantly, you might sell some and buy more bonds to restore your desired balance.

Think Globally

Don't limit yourself to domestic investments. Explore international markets, especially emerging markets or regions with strong long-term growth potential, such as China. International diversification can also help protect your portfolio from country-specific negative events.

Be Mindful of Over-Diversification

While diversification is essential, it's possible to overdo it. Holding multiple funds in the same category or funds that overlap too much may not provide additional diversification benefits. Focus on uncorrelated assets, or assets that move in opposite directions, to get the most benefit.

By following these strategies, you can effectively diversify your investments, smoothing out the peaks and valleys of the market and increasing your chances of achieving your financial goals.

Allocate your assets

Allocating your assets is a crucial step in achieving your financial goals. Here are some strategies to help you maximise your returns and minimise risk:

Prioritise Your Goals

The first step is to define your financial objectives and prioritise them based on their importance to you and your family. For example, funding your children's education might be the top priority, followed by saving for retirement or paying off high-interest credit card debt. Grouping your goals into categories of needs, wants, and wishes can help you determine the order of importance.

Know Your Time Horizons

Different goals will have different time horizons. Sort your goals into short-term (within the next two years), medium-term (three to ten years), and long-term (ten years or more) buckets. This will help you decide what types of investments to consider for each goal. For instance, less volatile and more stable investments are generally more suitable for short-term goals, while more aggressive investments with higher potential returns may be appropriate for long-term objectives.

Risk and Reward

When allocating your assets, it's essential to balance risk and reward. The Risk/Growth Bucket strategy involves investing in volatile assets that offer the potential for high returns but also carry the risk of deep losses. Examples include equities, high-yield bonds, and commodities. On the other hand, the Security Bucket strategy focuses on low-volatility, stable investments such as cash, cash equivalents, bonds, and guaranteed annuities.

Diversification

Diversifying your investment portfolio is crucial to minimising risk and maximising returns. Spread your investments across different asset classes, securities, markets, and time. This ensures that your overall portfolio is not significantly impacted by volatility in any particular market.

Dream Bucket

In addition to the Security and Risk/Growth Buckets, consider having a Dream Bucket. This is a fun and fulfilling aspect of your financial plan, where you set aside money for experiences or items that excite you and enhance your quality of life. For example, you might save for season tickets to your favourite sports team, upgrading your travel experience, or a new car.

Regular Reviews and Adjustments

Remember to review your investment portfolio regularly and make adjustments as needed. Life events, market fluctuations, and changes in your financial situation may require you to rebalance your portfolio to stay aligned with your goals and risk tolerance.

Frequently asked questions