The Ultimate Guide to Savings and Investments

The statistics on the level of savings of the general public in the United States are alarming to say the least. A survey by the National Institute on Retirement Security found that about 45% of the working age households in the United States had no retirement savings at all. Many others had savings which were not considered adequate for their requirements, given the rising life expectancies and health care costs. Moreover, savings are not only critical from a retirement point of view, but also in case of an emergency situation.

It is not surprising then that the government wants to encourage people to save more money for their future needs. They do this by giving a preferential tax treatment and tax breaks to certain long term and retirement saving options. Here some of the most popular and lucrative ways to save money and even get a nice return on your investment.

Savings Account

Your basic savings account is the most common and convenient way of saving some money in the short term. For longer durations, there are other better options available mentioned further along in this article. Savings accounts usually offer a modest interest rate which hovers around 1%. You can probably get a slightly better rate from a local credit union, but not my much. It might also be a good idea to check other features of the account like minimum balance required, initial deposit, debit card features etc. Given the modest interest rates on savings account, these features should be the deciding factor when choosing a bank. The advantage of a savings account is the convenience and easy access to your money. For day-to-day transactions, a checking account is still preferable since savings accounts generally have a monthly limit on the number of transactions. If you are looking for a medium term saving alternative – you might consider a Certificate of Deposit. CDs offer a better interest rate than vanilla saving accounts, but you have to commit not to withdraw the money for the duration of the CD.

401(k) – The first stop

For those of us who have access to a 401(k) or a similar employer plan, this is usually the best place to start saving. Some employers match the contributions of the employee and this is basically free money that everyone should take advantage of. Once you have maxed out your contribution to take full advantage of your employer’s plan, you can move on to other savings and investment options. Although the 401(k) is traditionally looked at as a tool for retirement savings, there are ways to use the money in case you plan to retire early as well. Be sure to study all the options that are offered by your employer before opting in.

In case of the self-employed, there is something called the Solo 401(k). This allows for self-employed individuals to save money with all the tax benefits of an employer plan. Since this plan is meant for individuals, it is much simpler to create and operate.

Individual Retirement Accounts (IRA)

After funding your 401(k), the next stop on the money saving trail is generally the IRA. These accounts allow for contributions towards savings and retirement by deducting an amount from the employee’s salary. IRAs generally come in two flavors - traditional and Roth IRAs. Traditional IRAs essentially allow for an upfront tax deduction when you make the investment. Roth IRAs on the other hand allow for tax benefits when you withdraw the money. Which one is better for you depends on your tax situation. For example, if you are likely to be in a higher tax bracket when you retire, then a Roth IRA is more beneficial.

Note than both 401(k) and IRAs have an annual contribution limit. If you have hit this limit, then it’s a good sign, especially if you are still young. You can go over the government specified limits here but you won’t get any additional tax benefit from it. At this point, you might be better off looking at some other savings and investment options.


Life insurance is actually a great investment option and a way to make some tax optimized savings, if you are looking for a long term option. Certain types of insurance policies pay an annual dividend rate which can hover around 4% to 6% and is practically risk free. Then there are the obvious benefits and coverage that insurance provides in case of any untoward incident. Therefore, you should strongly consider an insurance policy as part of your saving/ investment plan.

Investing in other assets

You should treat your entire net worth - all your assets like real estate, savings and investments - as a single portfolio. This will allow you to maximize your earning potential on these savings, while protecting you from any unnecessary risks.

The first step is to define your goals, requirements and risk profile. For example, if you are still young, you can have a greater appetite for risk. You also have to consider your liquidity requirements. For example, stock can be easily liquidated (turned into cash), while a residential property cannot. Finally, remember the most important rule of investing: Diversification.

Once you are satisfied with your investments in your 401(k) and your IRA, you can start looking at more exotic assets. For most people stocks and bonds offer a good option. If you are confident enough, you can choose and pick stocks on your own and add them to your portfolio. Be sure to diversify in terms of the sector/ industries you choose and it is usually better to go for big, recognizable names unless you really know what you are doing. Another thing to keep in mind while investing in stocks is the company’s dividend policy. Some stocks, like Coca Cola and 3M for example, are known for continuously paying an increasing dividend for over 50 years – earning them the title of Dividend Kings. This dividend income may come in handy if you are looking for a regular flow of cash. Then there are other stocks, like most tech companies for example, which do not pay a great dividend but grow in value over time. This is useful if you do not need a regular cash flow but rather a fast growing asset.

Investing on your own has its own challenges as well. Even if you feel like you are investing in a safe company, you might actually be buying in at a time when the company’s share is overpriced. Another issue is that some people tend to micromanage their investments more than what is ideal (like panic selling a stock every time there is some bad press) which costs a lot in terms of transactional fees, missed opportunities and taxes. If you feel that these issues might affect you then it might be optimal to invest via mutual funds, Exchange Traded Funds (ETFs) or some other such pooled investment vehicle. These investment products take away most of the risk of investing and diversify the portfolio on their own.

Note: IRAs also invest the pooled money in stocks, bonds and other securities. However, they have the added advantage of being tax-deferred.

More exotic options

Finally, there are other options like real estate, gold, commodities, emerging market securities and so on. All of these have their own advantages and risks as well. For example, gold is generally used as a hedge against inflation. Real estate offers a great diversification option and even if you don’t have the money to make a large scale investment, you can purchase stocks in Real Estate Investment Trusts (REITs). These provide the same advantages of investing in an actual commercial or residential property but with a much smaller ticket size and higher liquidity.

It is generally a good idea to do some thorough research before you invest in these options. Remember, these options should be considered only after you have sufficiently invested in more secure options like IRAs and 401(k). If you are investing in these or other seemingly exotic securities, instead of traditional options like 401(k) hoping for a higher return, then you are doing it wrong. If you do consider these options, limit your exposure to a small percentage of your total assets. At this point, it might be a good option to check with an investment planner as well.

Some general tips to help you save like a pro:

Start early. Whatever money you save will start earning interest and this gets compounded every year. Consequently, the sooner you start saving, the more interest you will earn over time. Also, it is generally easier to start saving when you are young and have some flexibility in terms of where you can spend and still manage your lifestyle.

Match what your employer puts in. Some employers offer to match your 401(k) contributions up to a certain limit. If you are not taking full advantage of this, you are basically burning cash. Consider an auto investment option. You can generally set up the option to automatically deduct a certain amount from your bank account to fund your savings/ retirement account. Consider this if you have trouble being consistent with your saving goals.

Have a goal and a plan. Setting yourself an investment or savings goal and then meeting it is probably one of the most rewarding feelings ever! This not only helps you stay motivated, but creates a habit of saving regularly as well. There are a few mobile apps which “gamify” the process of saving (basically turning saving money into a game you can play on your mobile), and these can be especially attractive to younger people.

Budgeting. Large corporations have entire departments dedicated to producing and revising their budgetary plans. The reason budgets are so important is that they are the most effective way of planning expenditure and control excessive spending. Set up a budget for yourself and track it at least on a monthly basis. It can be a simple table with income, major expenses, allocation to miscellaneous expenditure and savings.

Make use of IRAs. Not only do IRAs allow you to safely invest for your future, but they also incentivize your employer to contribute on your behalf. IRAs also have some great tax advantages which you should make full use of. The fact that the government offers these tax benefits on IRAs makes them one of the most attractive saving and investment options in the US.

Pay off high interest debt first. Many people might find it emotionally traumatizing to dip into their savings to pay off any high interest debt (like credit card outstanding). However, mathematically speaking, you would be much better off to eliminate these loans with high interest rates. Chances are you are paying a lot more as interest on these loans than what you are earning on your savings. Pay off that loan first, but make sure you are never in such a position again! If you find yourself in such a situation repeatedly, get rid of your credit cards – you are better off without them anyway.

A penny saved is a penny earned!

The truth is, no one ever really regretted saving too much. There are so many reasons to save money and so many great options to fit your every requirement, that it would be silly not to start saving at least a little bit. If you want save for a few days - just use a checking account; if for a few months - use a savings account; for a few years - a CD or maybe a mutual fund. And if you want your savings to last your entire lifetime, use something like an IRA, 401(k) or a diversified combination of investible assets.