How to Grow Your Savings in a Post-Recession World

This question came from a follower that wishes to remain anonymous:

“I’ve got a financial question I’m hoping you can help me out with. I’ve managed to accrue money in my savings that covers my rainy day fund plus some. Instead of just have my extra savings sit in the savings account, I would like to find a way to grow it. I’m not looking for a way to grow my money as quick as possible or take risks, but I would like to find a way to SAFELY and SECURELY grow it. What are the options for this, and what would be the best way to do it in your opinion? Thanks!”

Thanks for the question! Anytime you decide that you’d like to invest your money, you need to ask yourself a few important questions. First, what’s your timeline for this investment? Do you think you’ll want to use that money a year from now, five years, 10 years? It sounds simple, but so many people forget to put some thought into this.

Now that you’ve decided on an approximate timeline, how sure are you that you can keep that commitment? If you decided you want this to be money that grows for ten years, how confident are you that a situation won’t come up where you’ll need that money 6 months to a year from now? That right there is your risk tolerance. Some people will call this your Sleep Index, because it’s the amount of investment loss you’re willing to weather without it keeping you up at night.

So in your case, you’ve got a rainy day fund which could end up being long term money, but really needs to be treated like you might use it a month from now (in other words, keep it in cash). With that said, anything beyond that could be confidently used for longer term investments if there’s nothing better to use it on today.

Keep in mind, I said long term investmentSSSS. Some people get a chunk of cash and think it all has to be used for one thing. But, some could be earmarked for a kid’s future college education, some could go toward a mega trip of a lifetime, or some could be set aside for an large expense you know you’ll have to make a few years out (like a car, for example). I highly suggest you set up separate accounts for each goal to help you keep your eye on the prize.

So you’ve decided on your timeline, your risk tolerance, and you’ve identified what you’re most likely going to use that money for. Now, are you someone that’s going to manage this investment as time goes along? BE HONEST, NOW. Keep in mind, ten year money will eventually become four year money, three, two, and then one year money. You have to adjust the amount of risk you’re taking as you get closer to the goal since you won’t have as much time to recover if you experience a drop in the market. Are you going to be on top of that, or should you find a way to automate it now so you don’t even have to think about it?

That’s why I like to recommend Target Date Funds to people who are looking for a “set it and forget it” kind of investment. This idea was originally designed for people saving for their retirement that they knew would occur around a certain year, and that’s why you’ll often see them called “Retirement Date Funds”. Don’t let this fool you into thinking you can only use it for retirement savings. It’s simply a basket of stocks, bonds, and cash that are managed in such a way that the risk level decreases as you get closer and closer to a certain year—or in other words, set it and forget it. Don’t guess at whether or not you’re managing it correctly. Let some hot shot mutual fund manager do it for you! It’s a beautiful thing.

You’ll want to do your own research, but I’m a big fan of Vanguard’s Target Date Funds. Why you ask? BECAUSE THEY’RE CHEEEEEAP!!! Every mutual fund charges an annual expense ratio, which is the percentage that’s taken off the top of your investment every year. These fees pay the fund manager’s salaries and generally go toward things like keeping the lights on in the office. Some mutual fund companies decide to charge more to make a bigger profit, and Vanguard is one of the ones that just doesn’t. Their expense ratios are always WELL BELOW the competition’s. Again, don’t be turned off by the fact that they are marketed toward people saving for retirement. If your goal is 3-5 years away, you could go with VTXVX. If it’s 8-10 years away, go with VTWNX. 15 years out, go with VTTVX.

I hope that gives you some clarity on the issue, even if you don’t decide to go with my “set it and forget it” strategy. If you have any other questions, you know where to find me!