Do you know what one of the most popular questions I get asked is?
How I got to be so sexy How to make the most money off your savings :)
And why not? Who wouldn’t want every last dollar of theirs to be maxed to the gill and flow faster than Scrooge McDuck’s? We should all be able to take a dip in our wealth every now and then!
But here’s the thing – not every dollar of ours is meant to build wealth. Every dollar needs a *purpose*, but that purpose will differ depending on our current goals. Do you think money for bills and money for investments are to be used the same way? Or money for savings vs. money for paying off debt*? Of course not. Different attacks for different scenarios.
The *real* question to ask is:
What’s the mission of this dollar I have?
Is it to grow wealth? Protect my future? Save for that life-sized cut out of Kim Kardashian you’ve been eying? (Only $78 – what a steal!!). In some instances the returns matter greatly (investing) while others it does not (short-term savings, “fun funds” etc).
The point is, not every dollar in your pocket is used the same.
(*Though FYI – paying off debt is one of the BEST returns on your money! Just look at your interest rate and you’ll see why… Scary, but in this particular case kinda awesome! (But not really))
Here’s my general guideline of where I put my money, and why.
Money for paying the bills (this month): Checking account. It’ll be going out as fast as it comes in! Ain’t no one gonna make money off that.
Money for short-term savings (1 month – year): Savings account. While technically *savings,* you and I both know the money will be spent at some point in the near future, so it’s really more like *delayed spending*. But that’s totally fine! That’s the purpose of this particular bundle of bills here. And since we’re only talking about a short amount of time, and usually a small amount of money, the interest rate hardly matters here. What does is that you actually get the funds you need so you can complete the mission! So stop worrying about the best returns!
Money for long-term savings (1-3 years): Higher-yield savings account (or money market, CDs, bonds?). I personally mix all my savings into one main pot just for simplicity reasons (there is merit to separating them all out though!), but this is the point where your returns starts mattering more. Not the *most*, as again – we’re still talking about a relatively short term here – but it’s certainly worth investigating more. Remember that more reward = more risk though, and if this cash needs to be preserved above all else to hit your goals (i.e. earnings is a nice secondary), you’ll want to be careful and err more on the conservative side. Your chance to make a killing is coming up shortly ;)
Emergency Fund (forever :)): Higher-higher-yield savings. This is the part most people will start disagreeing on as it’s usually a bigger pot of change (if you even believe in emergency funds, which I hope you do!) but to me it’s just another area where cash is king and it’s not meant to make me insanely rich. It’s meant to make me richly sane (see what I did there?). And in a perfect world this cash would remain completely intact until the day I die.
Money for investing! (20-30-40 years): Stock market! Now THIS is the point where returns matter greatly! Your #1 goal here is to GROW GROW GROW, which means more risk, more funding, and the key ingredient of them all – more time. You’re not going to be able to retire off cash, so you’ll have to find the best strategy that works with your goals and personality, and then start turning up the heat.
For some this will be real estate, investing in businesses, starting your own business, hoarding gold and silver, collecting art or coins, and my personal favorite – the stock market. Particularly index funds, and particularly Vanguard (and particularly VTSAX. Particularly :)). Now each of these have their own set of pros and cons, so your job is to sort through them all and start dabbling in the ones that make the most sense for you. Maybe your fingers end up in a variety of them, or maybe you concentrate on the one or two that make the biggest difference to you, but whatever the case – you need to start pouring the money in and then leave it alone to get marinating… This will be the difference of you retiring at 60 or you retiring at 160. Or even better, 40 – if you’re ballin’ with the FIRE community.
This is the hardest, but most important, category of them all. And where you should be concentrating your chase of higher returns vs your savings account. (It DOES get easier as you start figuring things out :) Once you’ve got your strategy(s) picked, it’s all about just directing the money where it needs to go and moving on with your life! Time does everything from there!)
Money for wealth protection (until you die): Insurance. This falls into the “bills” section really, and is a part of the checking account system, however, I separate it out just to show that these dollars have their own distinct purpose too. And while it does mean money going out the window every month, it’s main job is to PROTECT you and your family in the event of anything nasty happening – like a car crash, house fire, your unfortunate demise!, and on and on and on… This is where other more complicated products come in too, such as estate planning or trusts or other insurance/investment type concoctions. No one enjoys funneling their money here, but at least it means you’re still alive!
Money to be blown! (Any day!): Savings. If there’s one area that gets overlooked the most, it’s your “fun money.” Or what I like to call “blow money.” Out of alllllllll the areas of finance, this is the one place you’re allowed to get crazy and do as you please! No questions asked (so long as you don’t tell anyone ;)). The amount here will differ for people ($50? $500? $2,000?), but the purpose of this money is clear: to have fun and release stress. You can’t go full throttle 24/7 if you don’t want to burn out. You need a release valve, and this fund here helps you do exactly that.
So… is it good to find the best ways to grow your money and ultimately your wealth? Indeed. But do you need to do it with every last dollar you bring in? No. At least I don’t think so.
Any time you catch yourself trying to max out every other dollar, remind yourself of what the true *mission* is for this money, and then allocate them respectfully. You always want more money in the *investing* stage than all others if you can, but we’re all in different places so just do your best and get that structure down pact as you go. The empire will grow from there!
And while you wait for your dollars to percolate? Work on making more of it!!
Now who wants to loan me that $78?