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Short-Term and Long-Term Savings Options

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The following is a guest post from Shelli Elledge at Written FYI.  Shelli is a business analyst whose interests are personal finance and healthy lifestyles.  Some of her financial ideas differ from the mainstream, but she offers additional viewpoints about saving and investment.  (Crystal’s Note:  She’s also a sweety, so be nice whether you agree or not with her non-typical option, lol.)

In many ways, savings, investment, and retirement plans are viewed differently than in the recent past few years.  Although the concept of saving for emergencies, large ticket items, and retirement is still the same, the tools are not as effective as they once were.  The traditional plans, including money market accounts, IRAs and pension plans, are under scrutiny as to their stability in today’s economic climate and are questionable as to whether they are user friendly.

Savings and Money Markets

Savings or money market accounts earn miniscule amounts of interest, and then the interest earnings are taxed at the end of the year.  This is nothing new.  It means that the earnings on these types of accounts do not keep pace with the rate of inflation.  To me, these types of accounts are not viewed as interest-earning but are simply a location to store one’s liquidity for temporary or short-term purposes.

IRA’s

Individual retirement accounts (IRAs) are retirement plans provided by various financial institutions.  There are several different types but the overall benefit is the tax advantage.  However, some of the disadvantages are that early withdrawals are penalized, mandatory withdrawals at certain age limits, meeting exemption requirements for withdrawals, and distribution amount requirements.  In a nutshell, the most unappealing part is the tracking, the restrictions, the penalties . . . well, you get the picture.

Pensions

Pension plans are not as common today as they used to be.  Many corporations have replaced it with the more-common 401k plan.  However, pension plans are still used by many government agencies as retirement plans for city, county, and state workers.

To put it another way, it’s the retirement plan that first-responders, firefighters, police men and women, and teachers, and other service workers rely on.  Yes, the same public service workers who protect and serve the public’s needs on a daily basis.  And it’s also the same type of plan that is being scrutinized in Detroit today because of that city’s dire financial problems.  Many retirees and future retirees are playing the waiting game and are anxious to see how the bankruptcy proceedings play out.  Although the immediate impact will be felt in Detroit, many other American cities are in similar situations.

Non-Typical

So, if the typical savings and retirement vehicles aren’t really so attractive, what choices do we have to house funds for long-term?  What I’ve done over the years is taken out whole life insurance policies.  I know . . I hear the groans now but don’t shut me off yet.

My husband and I both have term insurance policies as well as whole life insurance policies.  Term insurance is cheapest and we consider it a safety net in case we die.  After all, it’s the cheapest type of life insurance.  However, our whole life policies we have long considered avenues for long-term savings – with a death benefit.  Yes, it is more expensive but it does more things.

For example, we’ve used our policies to buy real estate because we’re able to access cash value in the accounts.  The insurance company considers them loans and we still pay them back, but the funds are liquid and it’s available for us to use.  There are no early withdrawal penalties and earnings on the funds housed in our policy are not taxed.  It forces us to put set aside funds, yes, just like we would set aside funds for a savings or retirement account.  But we are putting our funds in a life insurance policy, which is a financial tool that we should have anyway.

What sorts of accounts do you use?

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6 comments to Short-Term and Long-Term Savings Options

  • MikeS

    For my household, we have the usual categories. I have our liquid savings in a Capital One 360 account. We also have a brokerage account with Vanguard which we use to buy Vanguard’s Index tracking ETF’s. I have a 401k through my employer which is where all of our retirement savings are currently. I also have savings set up for our 2 kids. My daughter has a variable universal life policy with the cash value being invested in the stock market. For my son, I have a separate Vanguard brokerage account, as he can’t qualify for the same policy.

  • Thanks for the explanation of all those short-term and long-term saving options. Great stuff. I really need to include this information into my financial arsenal and financial blog.

  • For me, the best saving option for you is through investing. Putting your money on an investment vehicle will surely help you multiply it. That’s only my opinion, though.

  • retired

    It is interesting to hear different views on saving. As long as guaranteed savings is too low to help grow your savings, it is probably best to invest. I prefer dividend earning stocks. Totally liquid, not taxed until you liquidate them. And paying off all debt. Go ahead and use the low interest financing that is available, but keep the extra payments in the guaranteed savings account. Pay the debt off as soon as you can with that account and your will earn any interest over what your savings is paying you. Then you own stuff free and clear, just have to keep up with property taxes and the like, maintenance, and other fairly fixed costs (that you have to pay whether you own or buy on credit anyways.) You have collateral to use, if an emergency should arise.
    Buying whole life can make sense I suppose, but usually it has the same risks the mark has, but with no out. Why not manage your own money? Why give control to an insurance company that could become insolvent?
    Personally, anything a whole life policy could give you; you could get yourself. Unless you have dependent children, have a huge debt to pay off, or want to subsidize another relative after your death, why pay for life insurance at all? I am older and do not have any life insurance, despite have a dependent still living in my household. If we die, she will have enough to help her establish herself, as our other two have already done. Life insurance for us is way too expensive for the return and really not a good option. But this is just my opinion also. I have relatives that truly believe and buy whole life; wish them best of luck, as always. But I could tell you a few “horror” stories about it too. Make sure you know what you are buying into, how stable the firm is, and what your and your estate’s rights are before you sign up for whole life.

  • @ Mike, sounds like you are a saver who’s well-diversified! That’s awesome! Keep up the good work!
    @ Will, thank you for the comment. From personal experience, insurance is just one of the tools that we have used over the years. But we didn’t know when we purchased them how versatile they are.
    @ Mark, I agree that investing and compound interest are tools for future growth. And, it’s a lot more fun to watch the earnings growth!
    @ retired, I agree that the important part is that we grow our savings, and also know what you are buying! We look companies that are the oldest and most stable in the industry.

  • Roy

    It is sad that these days people have to consider the risks of their government letting them down with their retirement plans. Those risks exist at national and state level, and boil down to the fact that nobody can assume their pension will be there when they need it. For the last 6 years or more my priority has been to create an additional income to cover what my pension is supposed to be at 65, retirement age. Then, if the pension pot has been raided in some way, I am covered, but not retired. If the pension is still there, that additional income can all go towards a mix of savings in stocks, land, rental property and precious metals such as gold or gold stocks of well managed mines.