From a safety standpoint, it makes sense to set aside a percentage of your commissions in a reserve account. That way you can cover your obligations come tax time and have back-up money for when business is slow. And since the time horizon for these funds is short, it makes sense to deposit them in the safest savings vehicle you can find. The return won’t be great, maybe 1 percent, since that’s about what federally insured savings accounts are getting these days. But the point isn’t about making big gains; it’s about having the money available when you need it.
But for your long-term retirement savings, the calculation is different. You want something with a little more risk because your goal is to get a little more gain. If you put your money in a super-safe account, you can’t expect to earn much more than that federally insured 1 percent. Considering that inflation historically runs at about 3 percent, your 1 percent is unlikely to cover your loss of buying power as the years mount.
In REALTOR® Magazine’s latest Your Money Matters video, Victoria Gillespie of REALTORS® Federal Credit Union, a division of Northwest Federal Credit Union, suggests you invest your money in a mix of safe and slightly less safe investments. That way you can cover your principle risk with your safe accounts and cover your inflation risk with your slightly riskier accounts.
To help you make sense of it all, Gillespie suggests you think of investment options as levels on a triangle. Put a portion of your money in the safest investments, which are at the base of the triangle, put some in the next level up, where investments are a bit riskier but still conservative, and so on up the triangle until you get to the top, where the riskiest investments are found.
Gillespie also suggests you save your riskiest investments for those with the longest time horizon, maybe seven to 10 years. That way you can ride out the inevitable ups and downs of the market.
Watch and share the 7-minute video, the sixth in the Your Money Matters series, in which Gillespie walks you through the financial triangle as a tool for weighing risk vs. reward as you make your long-term investment decisions.