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Welcome to You and Your Money. Today's episode features Michael Baum, vice president and associate financial advisor at Weiss, Hale and Zahansky Strategic Wealth Advisors. today's discussion, tackling the age old dilemma, should you prioritize saving money or investing? Now, this debate has raged for decades between stashing cash and savings accounts versus putting it into investments like stocks and bonds. So let's start with the case for saving. Mike, what are the key advantages of keeping your money in savings? Well, the biggest benefit of saving through bank accounts, CDs and other savings vehicles is obviously unmatched. Safety and liquidity. the cash in a savings account is FDIC insured up to $250,000 per depositor, per institution, or per bank. So you can sleep well at night knowing that what you've got in the bank is essentially guaranteed by the federal government. It's going to be there when you need it, and that's important for people to have that liquidity, meaning you can quickly access it whenever you need it for an emergency, some sort of irregular expense, like, you know, your hot water heater broke or you need to fix your car. that money is right there where you, where you put it in the bank. or if you have short term goals or upcoming expenses, you know, you're sort of, you know, you're going to need that money soon. You want to keep it safe, and you don't want to put it at risk of any sort of loss. that's where those bank savings are going to be, you know, the most advantageous. you got that ready access to your money, and it gives people peace of mind. All right, so again, compelling points, especially the safety aspect. But as you mentioned earlier, the downside is that interest rates on savings accounts are, can be low sometimes under 0.25% annually. So while your money is safe in savings, it may not keep up with inflation over time, right? Definitely may not keep up with inflation. I mean, remember the old risk reward principle we just talked about how there's virtually no risk keeping your money in the bank, but at the same time, or the other side of that coin is there's very little reward for putting your money in the bank. the return from pure savings lags significantly behind investing, especially over longer time periods of five years. Or more. So if you look at historical data going back decades, the stock market, as measured by the S and P 500 index, has average annual returns around 10%. so this means money invested in a typical portfolio of stocks and bonds has the potential to grow and compound exponentially faster than money sitting in a low interest savings account. All right, so again, the higher returns from investing, very enticing, for sure. But of course, as you mentioned, investing carries more volatility, volatility more risk in the short term compared to the guaranteed safety of savings accounts. Absolutely true. Yeah. So investing has provided higher average returns over longer periods, but there's inherent volatility and potential for temporary losses, especially for stock heavy portfolios. So the stock market can definitely swing up or down significantly in any given year. and this is why an ideal financial plan really needs to incorporate a balanced approach, utilizing the advantages of both saving and investing strategies in a complementary way based on your specific situation. All right, let's cut to the chase. How do you find the right balance and determine how much to allocate towards savings versus investment? How do you do it? Well, I think it starts by establishing an appropriate cash reserve level that you're going to keep in savings. For most clients, we recommend somewhere between three and six months worth of living expenses to be set safely aside in cash savings as their emergency fund. And again, this protects against those unexpected costs. Or, you know, God forbid, you lose your job and you need to lean into your savings for a little while while you find, you know, your next, your next job. that's what that money's there for. And it's important, really, for everybody to have that cushion you know, for that sort of worst case scenario. Once you have that in place, the next thing to look at is really, you know, what kind of debt do you have? What kind of high interest debt? Like credit card debts even some of the home equity lines. Right now, those rates can be higher. If you've been looking at high interest debt, it really, it makes sense to pay that down before investing, because what you're really doing is you're paying interest, you're paying a high amount of interest, and you may not be able to do better than that interest rate in the market. All right, so again, great insights. Sounds like saving and investing really aren't an either or proposition, but rather a complimentary, balanced approach. And that's what we're trying to do to meet your financial needs. Right, right. So, you know, once you've got those initial bases covered, you can start prioritizing investing for longer term goals. but yeah, at WHz, we take individuals and families through our personalized and strategic plan well, invest well, live well process. And this allows us to, you know, deeply analyze each person's specific goals, their timeframes and their risk tolerance to build customized strategies that incorporate the ideal mix of cash reserves and invested assets and then tailor that to their unique situation and needs. So just to give a couple examples you know, a younger investor, somebody in their twenties or thirties, they've got a long time horizon before retirement. They may be able to prioritize investing more aggressively and keep a lot less in cash or fixed income investments because they have the time to sustain and withstand a short term volatility. those markets will recover and they'll benefit from investing and staying invested for the long term, whereas somebody a little bit closer to retirement they may not be able to stomach those swings. They may not be able to rebound from that downturn quite as well. So they may want to hold more in liquid lower risk cash and fixed income allocations. But at the end of the day, there's really no one size fits all when it comes to saving versus investing. It depends on your personal financial circumstances and your comfort level with risk. But almost any plan can benefit from utilizing both strategies in a balanced way. As always, thanks for listening to You and Your Money. Find even more episodes, videos and other resources at our website whz wealth.com. Weiss, Hale and Zahansky Strategic Wealth Advisors offer securities and advisory services through Commonwealth Financial Network member FINRa SIPC, a registered investment advisor, fixed insurance products and services offered through CES Insurance agency. They practice at 697 Pomfret Street, Pomfret Center, Connecticut 06259 and can be reached at 860-928-2341 Weiss, Hale and Zahansky Strategic Wealth Advisors do not provide legal or tax advice. The tenured financial services team strives to support clients and achieve achieving their financial life goals. For more information regarding wealth management and customized financial planning with Weiss Halen, Zahansky Strategic Wealth Advisors, please visit www.whzzwealth.com.
