The decision of where to store your savings comes down to a
number of factors. A financial advisor can be of great help, but if you
haven't got the money or time then these tips will help.
The first of these factors is whether or not you are looking for this money to grow or merely stay at the same amount over the savings term.
When assessing this, it is important to be aware of an economic concept known as Money Illusion.
Money illusion is a concept where people have a tendency to think of currency in nominal/face value, rather than real terms. In other words, the amount of money is mistaken for its purchasing power. The purchasing power of a currency will erode over time due to the effects of inflation. This means that over time, the amount of goods that can be purchased for a unit of a currency will decrease. As modern fiat currencies have no intrinsic value, their real value is derived from their ability to be exchanged for goods (purchasing power) and used for payment of taxes.
When looking at where to store your wealth, you need to recognise that where there is no growth occurring, your savings will effectively be losing value. Therefore, when you are looking at a suitable place to store your savings you need to assess the potential for growth of that savings vehicle.
The next factor that needs to be assessed when deciding on the appropriate place to store your savings is the time frame in which you will need to access these funds to pay for a future expense.
As discussed, because there are both known and unknown expenses the exact timing of when all of the money will be needed will, most likely, be unknown. Therefore, it is important that your savings plan should be relatively flexible in terms of its accessibility.
However, as a good financial advisor will tell you, in order to get good growth and benefit from the effects of compound interest, it is important that your money is put away for the medium to long term.
The key, therefore, is to have your money stored in a number of different vehicles each of which can offer you a different benefit. For example, some vehicles may offer your easy accessibility but poor growth potential where another may have poor accessibility in the short term but provide you with good growth potential where it is invested over the medium to long term.
Opportunity Costs:
When assessing an appropriate savings vehicle you must assess the opportunity cost that is involved. Opportunity Cost can be defined as the cost/benefit of the next best alternative that must be forgone in order to pursue a certain action. Put another way, the return on your money that you could have achieved by taking an alternative action.
If we apply it to savings, it may be the case that you can get a guaranteed rate of interest from one savings vehicle but forgo that interest rate in the hope of achieving a greater rate of return through an alternative that may not be guaranteed.
The first of these factors is whether or not you are looking for this money to grow or merely stay at the same amount over the savings term.
When assessing this, it is important to be aware of an economic concept known as Money Illusion.
Money illusion is a concept where people have a tendency to think of currency in nominal/face value, rather than real terms. In other words, the amount of money is mistaken for its purchasing power. The purchasing power of a currency will erode over time due to the effects of inflation. This means that over time, the amount of goods that can be purchased for a unit of a currency will decrease. As modern fiat currencies have no intrinsic value, their real value is derived from their ability to be exchanged for goods (purchasing power) and used for payment of taxes.
When looking at where to store your wealth, you need to recognise that where there is no growth occurring, your savings will effectively be losing value. Therefore, when you are looking at a suitable place to store your savings you need to assess the potential for growth of that savings vehicle.
The next factor that needs to be assessed when deciding on the appropriate place to store your savings is the time frame in which you will need to access these funds to pay for a future expense.
As discussed, because there are both known and unknown expenses the exact timing of when all of the money will be needed will, most likely, be unknown. Therefore, it is important that your savings plan should be relatively flexible in terms of its accessibility.
However, as a good financial advisor will tell you, in order to get good growth and benefit from the effects of compound interest, it is important that your money is put away for the medium to long term.
The key, therefore, is to have your money stored in a number of different vehicles each of which can offer you a different benefit. For example, some vehicles may offer your easy accessibility but poor growth potential where another may have poor accessibility in the short term but provide you with good growth potential where it is invested over the medium to long term.
Opportunity Costs:
When assessing an appropriate savings vehicle you must assess the opportunity cost that is involved. Opportunity Cost can be defined as the cost/benefit of the next best alternative that must be forgone in order to pursue a certain action. Put another way, the return on your money that you could have achieved by taking an alternative action.
If we apply it to savings, it may be the case that you can get a guaranteed rate of interest from one savings vehicle but forgo that interest rate in the hope of achieving a greater rate of return through an alternative that may not be guaranteed.
A website that puts give you access to a Financial Advisor so that you can get the Financial Advice you need.
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