Invest Your Latte Savings
By Kristi Vaughan
Author David Bach talks about the "latte factor," where you can save big money over time by giving up unnecessary luxuries that cost more than you realize. So now that you’ve stopped drinking lattes, how are you going to invest the money you are saving?
Savings accounts are not investment accounts
Investing and saving are different. Savings are those “rainy day” funds -- the money that you are holding onto in the hopes of taking a great vacation, buying a new car, or even splurging on designer shoes. Savings tend to be held in “safe” areas such as savings accounts, checking accounts or certificates of deposit and insured by the Federal Deposit Insurance Corporation. Savings is money you can get to quickly and without having to “sell” anything.
Investments are money with a longer-term outlook. You use your investments to plan for retirement, save for college or build up the funds needed to make a down payment on a house. Investments do not carry the FDIC seal of safety – your investment can lose money, and not just to inflation. Investments tend to be made in such areas as bonds, stocks, mutual funds, real estate and commodities.
Investing begins with savings
Before you can begin investing, you need to save enough money to:
- have a readily accessible emergency reserve, and
- afford to be able to invest.
Most financial planners recommend that you keep in savings an amount equivalent to three to six months of your income.
There is no absolute minimum needed to begin investing. Many mutual funds will allow you to open an account with as little as $250 as long as you agree to make regular deposits and grow your balance. Such systematic investing also allows you to take advantage of the investing strategy known as dollar cost averaging.
Where to invest
Depending on the amount of money you have available, market conditions and your own tolerance for risk, there are several investment options. Among the most common are:
- Stocks: Stocks offer you ownership in a company. The more shares of stock that you own, the greater your ownership. Stock price (and the value of your investment) can rise or fall. Some companies pay dividends to stockholders.
- Bonds: When you buy bonds, you are loaning the issuing company money. The company, in turn, agrees to pay you back by a certain date at a preset rate. If you hold the bond to maturity you will get back your initial investment plus the interest. Bond prices also can fluctuate so if you sell before the maturity date, you may receive more or less than your original investment.
- Mutual funds: A mutual fund is a pool of money that has come from many different people and is invested in stocks, bonds and other assets. The management team of that fund typically makes investment decisions. This management team receives a fee for overseeing the fund. The price that investors pay for each share represents the funds per share net asset value (NAV) plus shareholder fees, including sales loads. Like stocks and bonds, the price can fluctuate.
Professional management or not?
As an investor you can choose to have someone else guide your investment decisions or you can make all the decisions yourself. In either case, you will need a third-party intermediary to do the actual buying and selling. That is where brokerage firms and mutual fund companies come in.
If you are buying or selling mutual fund shares, you often deal directly with the mutual fund company, though you can sometimes go through a broker. For individual securities, you can use a full-service stockbroker or a discount broker. The big difference is the amount of advice you will receive and, consequently, the size of the commission and fee that you will pay. You will pay less for the buy/sell services of a discount brokerage but you probably will be doing most of the research and decision making yourself.
If you opt for the do-it-yourself or self-directed investment option, there are many services and Web sites that can educate you and provide financial fundamentals on individual stocks. Some sites charge a fee for the information they provide.
So now that your spending has decreased, what are you going to do with the money?
