Advertisements inviting people to invest in mutual funds are plentiful. We see them on television, the internet, even in stadiums at sporting events.
In years past, the offer to invest your money seemed to always come with the implied promise of high returns and the best money management. However, since the financial fall of 2008, even if people were somewhat open to the idea, the door has all but completely closed in the minds of many. Here is where understanding comes in. The more you can grasp about these financial tools, the less intimidated you will be, even in the face of past trouble in the financial markets.
Should I invest in a mutual fund?
Is a Mutual Fund the Only Way to Save Money?
Saving money is important. Equally important is earning the highest rate of return on your money that you can. When we go shopping it would be absurd to want to pay the highest prices for merchandise. Likewise when it comes to your money, do not settle for the lowest interest rates. Does that mean though, that you must invest in a mutual fund in order to achieve the best rate of return? Not necessarily.
We say that because it all depends on what goal you have in mind for the money that you are saving. Money in a bank account such as a checking or savings account is guaranteed by the Federal Depositors Insurance Corp. Funds saved in a mutual fund are not guaranteed but are subject to fluctuation.
Therefore if the purpose of the $150 per month you have been saving is to put a down payment on a new car next year, then you likely would not want your money to be subject to fluctuation, even if there was a small chance you could earn a higher percentage rate. On the other hand, if the goal is to save that $150 per month for a financial goal that is, let’s say, 15 years away, then a mutual fund may be just the right thing for you.
What Are The Potential Rewards of Investing in Mutual Funds?
Let’s go back to our example of monthly savings. You decide to save $100 each month and you put it into a mutual fund, averaging a 7% annual return over the next 15 years. Your $100 monthly savings after 15 years would turn into $31,881! Now compare that with what you are earning in your bank account. As of this writing, today’s bank rates are at about 1% at best. Clearly, if your financial goal is long term, a mutual fund may be a much better way to go. There still is always a place for a savings account though, especially when saving for short term goals like vacations, home improvement projects, emergency funds, a new home or vehicle, and so forth.
As we hinted at out the outset, many people have shied away from mutual funds because of the loss of so much money in 2008. However, that need not frighten you away from using such effective savings vehicles. It takes time and effort to find a mutual fund that has fared well during the good and bad times, but the rewards are well worth it, if you have long term financial goals. In a future article we will discuss the folly of putting off developing a savings plan for years, versus the benefits of starting a savings plan as early as possible.