Last month, I wrote about Mr. Market and investing. I defined investing as money you are willing to risk in exchange for a higher rate of return. This month, I’m devoting this column to savings.
Savings is money you cannot afford to lose because it’s earmarked for something in the future. Examples would be savings for a down payment on a house, college, etc. It has certain characteristics – such as safety, liquidity and rate of return. These are very important components to the basis of any financial plan. We all typically think of savings as money we store in a bank account, certificate of deposit (CD) and money market – or in some cases under the mattress. These are all pretty safe, except under the mattress, which has exposure to theft, fire, etc.
As of today, the average savings account, according to Bankrate, is yielding .17 percent with top-yielding savings accounts receiving up to 2 percent. I have seen a couple banks recently offering 2.75 percent on CDs. Either way, the yield is low, and when you factor in taxes, in most scenarios, you are losing money to inflation. Believe it or not, but in today’s environment I would argue that these accounts that were traditionally considered safe are now risky.
The best investor I’ve studied and whom most would consider the best of all time, Warren Buffett, said that risk is measured in the ability to keep up with inflation on an after-tax basis. This is by no means a recommendation to stop saving money in these traditional places; however, I believe that today, more than ever, it makes sense to diversify savings in another vehicle.
I’m referring to a properly structured cash-value life insurance policy. Structured properly, it is safe, liquid, offers guarantees and yields an after-tax rate that makes it less risky than the traditional savings vehicles with which we have grown accustomed. Unfortunately, I have seen this product not setup properly many times, but if it is and with the right type of company, it can be a key component to savings plans and later in life for retirement.
Most readers probably didn’t notice that I never mentioned the death benefit. If structured properly, the death benefit is just that, a benefit. Savings has many uses, but one use that is commonly overlooked is its utility in retirement. Too often people have confused saving with investing.
In retirement, if savings aren’t adequate, people are forced to pull money from investments at times that may not be beneficial – such as a down market like we experienced during the fourth quarter of 2018. It’s important to have both.
Wealth management companies are available to help develop savings and investment strategies that could prepare you for challenges ahead.
~ Lee Williams is a financial advisor with Nowlin and Associates Wealth Management in Alexander City. He can be reached at Lee@NowlinWM.com or 334-703-3454.