You Asked, We Answered

How Will I Ever Save Enough for All My

Long-Term Goals?

Try This ‘Financial First Aid Kit’ to Protect Your Future

 By Arkadi Kuhlmann

Q: I have so many long-term goals to save for—college tuition for my two children, retirement savings, vacation and emergency funds—and so many savings and investment options to consider. What's the best way to make sure that I will have enough for all my future financial needs?

A:  Many Americans are facing the same issue, and unfortunately, they’re being bombarded with investment services and multiple credit-card offers that only make things more confusing. Recent government statistics show that personal debt in America is at an all-time high, and the personal savings rate is at an all-time low.  While the American Dream is alive and well, you will need to keep working to retire comfortably.

 At the same time, it’s critical to protect the financial well being of your loved ones. Whether you’re young, old, married, single, with or without kids, one of the best things you can do is put together a “financial first-aid kit” to protect your financial freedom. 

Here are five easy, inexpensive ways to gather the financial essentials every family needs for future security or to be able to cope in a crisis:

1.       Establish an emergency savings account.  This is the money you’ll use if you’re laid off or confronted with unexpected home-repair or medical bills.  Have a set amount automatically transferred into this account from your checking account every month until you have at least three months’ worth of living expenses, if you have a two-income household, or six months’ worth, if you’re in a one-income household.  Then pretend it’s not there and let compounding interest do the work, the same way ING DIRECT’s Orange Savings AccountÔ works.

2.        Maintain a good credit rating.  This is important: pay your credit card and mortgage bills on time!

3.       Apply for a low-cost credit card—and use it wisely.  Do some comparison shopping to find the best rate, and then use your credit card for convenience not necessities, paying your balance in full each month.  Too many Americans use it as a way to borrow money, and then they pay enormous interest charges.  That money never returns.

4.       Start saving for retirement.  Take full advantage of any retirement plan available to you at work, and if your company offers matching funds, save the maximum amount.

5.       Open a college fund for children or grandchildren.  Today’s world demands a college education to get ahead.  Look for a savings account with low or no fees, and a good return.

Best Place to Stash Your Cash:

Money Market vs. Savings Accounts

            You’ll want to stash some of your long-term retirement savings in stocks and bonds or mutual funds that invest in both.  As shorter-term savings vehicles, you have the choice of high-interest-bearing savings account or money market funds.  Money-market funds are mutual funds that  invest in short-term financial instruments such as treasury bills, commercial paper (an unsecured, short-term financial instrument, such as a loan or line of credit, used by companies to finance short-term financial needs) and asset-backed securities (an asset backed by notes or receivables against assets other than real estate, such as cars, credit cards and royalties).  Money-market funds may have more initial appeal to consumers by virtue of their apparently higher rate of return and their image as a “safe” mutual fund.  But if you examine them closely, you will find that you take on more risk putting your money in money-market funds than you do with a bank savings account.

First, money-market funds aren’t bank deposits, and thus they aren’t FDIC-insured like bank accounts are. The law doesn’t require them to be insured. There are some exceptions, however: if the money-market fund is offered by a bank, it may be insured. Be sure to ask before you put your money in.  If a mutual fund company goes out of business, you’ve lost your money.

            Second, by law, money-market funds have to invest at least 95 percent of their assets— your money—in top-notch short-term debt such as commercial paper and Treasury bills.  However, high-quality debt is getting tougher to find and the amount of T-bills being issued by the government is shrinking. Also, depending on what the economy does in the next few months, some commercial paper issued by safe corporations (companies that have a high credit rating) today may become extremely risky in the future, since corporate downgrades or bankruptcies can severely damage the value of commercial paper. 

In an environment where interest rates are dropping, as they are today, when 90-day T-bills come due, money-market funds can have trouble maintaining their high rate of return, since the rates on T-bills may drop during that time, too.  To try to maintain a high yield, a money- market fund may invest in riskier and riskier debt.  Six months down the road, they may experience a precipitous drop and even a negative return.  This has happened to some very reputable money-market funds.

Finally, when rates do go back up, a bank will often raise their savings rates faster than a money-market fund will.  Isn’t it smart investing to get the best rate as soon as you can?

Bottom line: When you put your savings in a money-market fund, you’re basically entrusting a fund manager who may be willing to take on greater risk than you would.  And you won’t know what the fund manager’s investment philosophy is unless you spend time doing your homework. How much homework do you want to do?

           So when deciding where to invest your money, remember that while money-market funds may give you a better rate of return, it’s up to you to weigh your tolerance for risk vs. potential reward and consider the safety and security of your money. 

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 Arkadi Kuhlmann is the President and CEO of ING DIRECT, which is the operating name of ING Bank, fsb (Member FDIC), a Federally chartered savings bank, and part of ING Group (NYSE: ING), one of the largest financial services institutions in the world. ING DIRECT has nearly 230,000 customers and approximately $2.6 billion in assets as of August 31, 2001. For product information or to open an account, visit ingdirect.com or call 1-800-ING-DIRECT.

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