5 Common Sense Tips on Saving and Investing Your Money

Americans are struggling when it comes to saving money for retirement. According to a study published in the Employee Benefit Research Institute (EBRI), Americans are facing a combined retirement shortfall of $4.55 billion, or $47,000 per adult! Why aren’t American’s saving more money for retirement?

The biggest reason most Americans fail to save money is that most opportunities to save and grow your money either pay very little (like banks or bonds), are too complicated and risky (stock market / mutual funds / currencies) or are just plain terrible investments (Insurance cash value plans or annuities).

If you are considering putting your money some place in an effort to save and grow your money, ask yourself the following common sense questions:

1. Do I understand how this works? Here’s some really simple advice: If you don’t understand it, don’t put money in it. Also, how much effort does it take to understand this opportunity? How many factors are involved in order for you to make a profit? Many companies put your money through a ‘Rube Goldberg’ type machine that makes something simple seem very complicated and difficult to understand. Don’t be fooled. Earning money should be simple. If something simple is made to be complicated, then chances are someone is trying to hide something from you, such as fees that will eat into your profit.

2. Can I accurately predict the future value of my money? If the answer is ‘past performance is no guarantee of future results…’ then the answer is NO. How can you create a financial plan unless you know what you are going to earn in the future? Why risk your money unless you are able to calculate the future value?

3. What protection do I have if things go bad? In essence, what collateral do you have for your money if things go bad? Banks offer FDIC Insurance as protection, but there is a limit to the amount and receiving the money may take weeks or months, if not a year. Collateral is one of the most important items to look for when determining whether or not you should put your money in a certain place. The stock market, for example, offers no protection against loss. If people had asked Ponzi schemers (like Bernie Madoff) about collateral, they would not have been duped out of their money. Unless you have collateral in the form of a tangible asset, then you are simply hoping that you don’t lose your money.

4. Are the fees, expenses, or charges involved at a reasonable rate and are they disclosed in an open and honest manner? Depending on what entity you are growing your money in, taxes may already be dwindling any profits you may have, and these extra expenses can further eat into your profit margin, possibly making the investment opportunity not worthwhile. Take bank accounts, for example. You earn a low interest rate and pay taxes on the ‘profit’. But to make matters worse, banks add so many fees, charges, and penalties that it further eats into your profits, creating a loss for many depositors. Another example is mutual fund managers. Making a profit in the stock market is already risky and difficult enough task, but adding extra brokers fees on top of it barely makes it worth the risk.

5. Can I earn interest and still keep my principal? Why do Life Insurance Companies combines life insurance with savings plans? For the simple reason that these companies make tremendous profits off its customers by doing so. Unfortunately about 70% of Americans have these types of cash value life insurance policies. I’ll give you a personal example of why cash value life insurance policies are horrible investments. My father contributed to an annuity for 40 years and saved $70,000 for his retirement. When he turned 72, his principal ‘annuitized’ and he began receiving payments of $300 per month, and would continue receiving payments for the rest of his life. Unfortunately, he died 3 months later. Since his principal had annuitized, his beneficiaries were not able to receive the principal. My father spent forty years contributing to this plan to only receive a $900 return. To make matters worse, he died at the beginning of the month and the insurance company had the nerve to demand the last $300 check be returned. If you have to give up your principal in order to earn a guaranteed interest payment, you should not make the investment.

As stated above, common sense tells us that when deciding whether or not to put your money someplace where you can grow it, you will want to make sure you understand how you’re going to make money, exactly how much money you will get back, what collateral you have if things go wrong, what fees, penalties, or expenses are involved (and if those expenses are acceptable), and if you can keep your principal while receiving interest payments. Trust your gut. If someone offers you a way to make money but their offer doesn’t pass any of the above tests, you probably shouldn’t do it. Remember, earning money is meant to be simple, and if it sounds complicated or you cannot accurately calculate your future value, then you are just simply guessing and hoping for a return.