by ARC IDEA CO

Created on: July 21, 2007   Last Updated: December 15, 2010

Being in a position of excessive debt is undesirable which is why financial management is very important in life. In order to have some money to fall back on in meeting with unforeseen circumstances, everyone knows that all you need to do is just save. But is it as simple as just putting your money in the bank and earn that fixed, almost no risk return?

Well, it is not wrong to maintain the habit of being thrifty as well as saving. Having a substantial amount of money in your bank account does make you feel secure, but there are better ways. As of current, there are many ways to boost your savings in financial instruments like bonds, fixed deposits, fixed ordinary shares as well as saving insurances.

In order to build a financial safety net, saving alone is not adequate in my humble opinion because it is just not effective at all. Hard earned money is not working enough for you in typical banks. First and foremost, a strategic approach is needed to build this safety net of yours. Essentially, it is rather subjective in the sense of the target amount to be saved to create that crucial net. Which is why, I will substitute amount with percentage.

The most important thing to do is diversification. The reason is clear that it will harvest a higher return this way and minimizing the already little risk. Saving diversification generally consist of general saving, bond saving and regular saving.

In the case of general saving, it is the lump sum of money which you would like to commit in the bank for your financial needs. This should be at least stipulated at 40% of your total saving. Another 40% should be placed in bonds and the reasons for doing this are significantly higher annual returns and potential capital increase. People may say that bonds still involved risk, but if you were to calculate the annual returns as compared to the bank, it is comparatively and way more than the interest rate you get in typical banks. Although it moves up and down, but the trading band is very narrow and small, you will never lose as much as you would in stock markets. The rest of the 20% should be placed into a regular saving plan for insurance policies or unit trust funds. Unit trust funds do not provide a guaranteed return as compared to insurance policies. But the trade off on the other side of the coin is that unit trust funds has potentially higher returns. If you are a low risk investor, try funds dealing with properties and real estates. Real estate investment trusts are very popular these days because it not only stable and low risk, most of such funds offers you quarterly payout.

With such diversified saving strategy, you will not only able to enjoy a higher return in any economic climate, you will have a significantly higher returns than average people who just park their money in banks. These financial instruments are of high liquidity as compared to fixed deposit where a stipulated period is needed to be fulfilled for the interest to be paid to you. With that, you will have an effective net for your rainy days and a cash cow during sunny days.

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