Many farriers’ idea of “saving” money is to hoard just enough to buy the new forge that they can’t live without. If they would only properly invest a few dollars a month, this type of paycheck-to-paycheck living would be a thing of the past. How do you properly invest money? Here are a few smart ways to invest.

Savings Accounts: Think Of Them As Your Piggy Bank

Savings accounts are wonderful places to keep money that is very liquid or easy to get to if you need it. Money in these accounts earns a small rate of return with very little risk. That makes them great places to store emergency funds, which is a fundamental part of any personal finance strategy. An emergency fund is a buffer or fall back in the event of a personal crisis, such as an injury, loss of customers, buying a new furnace for the home, etc.

Savings accounts have advantages. You can get to your money at your convenience. Your money — in the right account with the right bank — can give you a nice return at very little risk, as the accounts are insured for up to $100,000 per person by the Federal Deposit Insurance Corp (FDIC).

Your savings account should have enough emergency funds to cover 2 to 4 months worth of your expenses. This should be enough of a buffer to cover most any personal crisis.

Once your savings account reaches a point where it holds more than what you would need for personal emergencies, you should be looking for a place to put your money for the long term. There are a lot of options for investing such as bonds, corporate funds, stocks, etc. However, a few simple options worth considering are high-yield savings accounts, investment accounts, certificate accounts, money market accounts and retirement accounts.

Seek Bigger Payoffs

Collecting the money for your shoeing is just the beginning of getting your business on a firm financial footing. You need to develop a saving and investment strategy.

Fortunately, there are now savings accounts with all of the features of a regular account including FDIC insurance and ease of deposits, but with an interest rate that 4.5% to 6%. They are known as high-yield savings accounts. A typical savings account earns about 0.5% annual percentage yield (APY). That means at the end of one year, you would earn $45.50 more on $1,000 in a high-yield account vs. a typical savings account (assuming 0.5% APY on the regular account ant 4.5% on the high-yield account.). Compound interests means that money you make in a high-yield savings account will also continue to grow faster than in a typical bank savings account.

Find a bank that you like, sign up, and transfer some money into the new high-yield savings account from your checking account. Set up an automatic withdrawal plan from the checking account into the high-yield savings account. Just a little bit each week will steadily grow the account over time.

Investment accounts are reasonably liquid, as you can pull out any money needed at any time, but because the funds are not guaranteed, they are a little riskier. For example, the Vanguard 500 has returned an average of 12% a year since the middle 1970s, but the return is not guaranteed year-after-year. Some years have shown a loss, while others have had incredible gains. The potential returns are too good to pass up when it comes to investing. Typically, your money doubles every 6 years in a Vanguard 500, while in a 5% savings account, your money doubles every 16 years. It is not always wise to invest everything in investment accounts. There have been many years that returns were positively scary with 20% losses. The positive gains occur over a long term. You need to put money in and not spend too much time tracking it or worrying about what you hear or see in the news.

If you have $500 or more in extra cash, you can purchase a certificate of deposit (CD). CDs are a way of investing a fixed amount of money for a fixed term (typically from 3 to 60 months) usually at a fixed interest rate. They are a great way to put away some extra cash and collect it at the end of the term. At that point you can purchase another CD or deposit the money into another account.

Use The IRA Advantage

Another way to save money is to open an Individual Retirement Account (IRA). Government and employer-sponsored retirement accounts such as a 401(k) and an IRA are the best ways to save for your retirement. The money invested will continue growing, tax free, until you are eligible to begin drawing it out.

For the most part, IRAs are designed as long-term savings accounts. There are also short-term or fixed-term IRAs if you don’t want to have access to the money in less than 10 years. This type of account has advantages for a person who has a chunk of money saved and wants to increase its earning power, but to have access to it in 5 to 10 years to buy a house or other large ticket item.

There are several types of retirement accounts. Examples are 401(k) and 403(b) for employees at larger organizations, IRAs such as Regular, Spousal and Roth for just everyone, and Simplified Employee Pension Plan (SEP) IRAs, Keoghs and Savings Incentive Match Plans for Employees (SIMPLEs) for small business and the self-employed.

IRAs are the most powerful retirement vehicles available to most of us. They offer compound interest, reduce your taxable income, are tax-deferred and have consistent savings.

A Step-By-Step Approach

So with all of this basic information, how do you go about saving money?

1. Open a checking account if you do not already have one.
2. Open a savings account if you do not already have one.
3. Establish an online account if you have Internet access so you can transfer money at your discretion. (If you don’t have Internet access, don’t worry. You can make transfers in person.)
4. Establish an easy-to-earn amount of money to put into the savings account each week. Choose a day to do it (I use Thursday). How much money? Start off simple to get into the habit — $10 to $20 a week is good. In business we call this paying yourself and calculate it by starting with one hour’s worth of income every day, or 5 hours a week. A person making minimum wage ($7.15) would be depositing $35.75 a week into this savings account. At the end of 5 years, $35.75 a week ($1,859 a year) would had grown to $13,158, including interest. Imagine increasing that amount to $100 a week. You’d have $36,806 at the end of 5 years.
5. Once you have enough in your savings account equivalent to 2 to 4 months salary, it is time to start putting funds into a higher-powered money-making account. If you are making minimum wage, you need to have from $2,288 to $4,576 in the savings account to meet the 2 to 4 months of emergency money. At the $35.75 a week deposit, it should take you less 1 1/2 years to build this reserve fund. Keep your savings account and growing interest.
6. Now decide to make future deposits into a high-yield savings account or IRA. Both are fine choices, depending on your age and goals. If you think you will need the money within 10 years, then choose a high-yield savings account or a fixed-term IRA. If you would like to start saving for longer term goals, such as retirement, then open a SEP IRA. Putting $75 a week into a IRA will give you a return of roughly $61,453 in 10 years, $227,811 in 20 years, $678,146 in 30 years and $1,897,224 in 40 years. You can determine this yourself by utilizing on-line retirement calculators to determine your return on what you deposit weekly.
7. Once your savings account is adding interest and you are making deposits into your IRA, you will need to decide the best use for this money. Increasing payments into your IRA will mean you have more to retire on. Making additional deposits into your savings account will give you more of a buffer against emergencies. Opening a high-yield savings account will further increase your income. You’ll be surprised at how soon your financial situation starts looking great due to your efforts in developed a system of easy, consistent depositing. ?r