A savings account is a great start, and can be used for a multitude of things, whether it be saving for a house, or maybe a boat, golf cart, or any other sort of toy. However, a savings account can also hold you back from reaching your goals. How, you ask? The average interest rate for a savings account in 2022 is around .07%, and as a young adult you are missing out on a lot of money if you keep the majority of your assets in a savings account at your local bank. Let’s say for example that you have a balance of $10,000 in your savings account that is accruing interest at the 2022 average rate of .06%. You are looking at an interest payment of $60 throughout the course of the year. Now let's say that you invested that $10,000 on the moderate risk level side, and your goal was a 6-8% return for the year. Even if we go on the low side of that return you are still looking at a $600 gain, compared to a $60 gain. Continuing to contribute to your investments, reinvesting dividends, and reinvesting your capital gains could make that 6-8% return goal even higher.
One thing Zephyrus always encourages is to keep three to six months worth of living expenses in your savings account. A general rule of thumb we created for ourselves is that if you don’t have any large expenses like a medical condition, or children, we aim for three months. If you find yourself on the other side of this, we like to aim for six months. Keeping too much capital in your savings account can create opportunity cost. Summed up- missing out on potential gains!
In your early professional years the growth in your 401(k), maybe an IRA, or a regular brokerage account is crucial. When you are 45 and in the middle of your career you don’t want to be kicking yourself for not saving for retirement when you were younger, and you definitely don’t want to be 55 and have the urge to retire in five years and you can’t because you didn’t start saving soon enough.
Something we seem to hear quite a bit from young professionals is that they like to have their money all in one place, and they want to wait “until the right time” to start investing. We have tended to find a reason for younger people holding onto money like this is because they are under the assumption that investing can be illiquid. Part of this is true though. You do need another party on the other side of your trade, but unless the volume of that particular security is low, chances are you are not going to run into this problem.This younger generation of workers see the people on social media that day trade, or invest in individual stocks, and assume that is how it works across the board. They want to partake in these short-term gains on risky stocks.
Young professionals should really find Exchange Traded Funds (ETF) and mutual funds that meet their financial needs and objectives. These are both very liquid assets and you can have your capital back within the span of a few days. These options are similar, and offer a better chance at a higher return, both in the short and long term. Mutual funds and ETFs capture a broad range of companies. Different funds will have different objectives that will help you pursue your goals.. For example, you can find funds that are strictly invested into real estate companies, or a fund that contains all large cap companies that focus on investing in themselves and continue to grow the company. Mutual funds and ETFs offer more diversity than an individual stock, and they can hold a multitude of individual equities, and having that diversity brings down the overall risk of your investment. Going the ETF and mutual fund route over an individual stock may help alleviate some of the stress and fear of investing. They are investments that are meant to be held for a longer term. When you go the individual stock route, you are really banking on that company to perform well.
Just keep in mind that your investments are a long-term play, and that the swings in the market will have little effect on you. We are young, we can afford the swings, and over the course of our professional careers we will see a positive return when the time is right for us to call it a day on our careers.
Examples for illustrative purposes only and the return is not indicative of any actual investment. Actual investment results may differ substantially.
* A diversified portfolio does not assure a profit or protect against loss in a declining market.
* Mutual funds,are sold by prospectus. The Prospectus contains additional information that investors should consider carefully such as the investment objectives, risks, charges and expenses. A prospectus is available from an Investment Executive. Read carefully before investing or sending money.
- “What is the average interest rate for savings accounts?” – Bankrate.com
- Written by Matthew Goldberg