- Personal Finance
What are the Different Money “Vehicles”?
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Different Money “Vehicles”
Many people refer to different types of savings accounts and alternatives as “buckets”. You will hear people talk about the retirement bucket, your short term and long term buckets. This analogy may help get an idea that you are placing your money into a type of holding tank, but I want to take it a step further.
I want to go beyond the buckets because many people have negative opinions to unfamiliar financial products, this is a natural human response to the unknown. I think that there is an analogy many people can better relate to in order to better explain why different financial products are necessary for certain situations and goals, and why using them properly can maximize your money, while using them improperly can hinder you from reaching your goals.
When people hear about savings and checking accounts, a 401k, life insurance, mutual funds, 529s, bonds, stocks, CDs, Roth IRAs and many other financial products they tend to shy away from them because they do not understand what they are and how they are used. That is why you will see many people under insured, with no portfolio, and using other products improperly and minimizing their effectiveness.
Here is where my analogy kicks in.
I am going to compare different financial products to different types of vehicles. I think we are all familiar with mini vans, economy cars, trucks and four wheel drive vehicles. I also think we can agree that there is no perfect vehicle for every situation, but that certain vehicles are tailor made for different types of conditions, drivers, families and other factors.
401k is like the 18 wheeler semi truck- It is hard to get started, takes a while to warm up, but once that truck gets rolling, it only gets better. And man can that truck haul a lot. As it continues its journey it picks up more and by the end of its trip, you are able to reap the rewards.
Basic checking account is like the Toyota Corolla- It is great and efficient for your everyday trips. It is efficient, useful, and does exactly what it is intended to, but not much more. The Corolla can't store a lot, can't haul anything, and although it will keep its value for a long time, unlike the truck it will not gain more as it travels.
Basic savings account is like the Ford F150- This truck has a little more room, and some additional features the Corolla may not have. But what you get in some luxury items you give up in efficiency. Since a savings account only allows up to 6 withdrawals a month. You can haul some additional earnings in this vehicle, and its cab makes it easily accessible. There are usually fees associated with the savings account, like with a truck it will cost more in maintenance and upkeep.
Stock investing is like the sports car- they are flashy, can be fast in speed and how the money grows. They are a pain to upkeep, and unless you invest as a hobby, or a career, owning a sports car is only something for those that have other forms of transportation during bad weather or long trips.
Life insurance is like the Jeep Wrangler- There is nothing fancy about it, it is the definition of an utilitarian vehicle. It will get you to your destination, and get through everything with little upkeep and the minimum investment. Everyone can benefit from this type of vehicle, but trying to use it beyond its purpose will be costly.
Credit card is like the minivan- how versatile is this? It can almost do it all. They come in all sorts of colors, options, and all of the different bells and whistles. You can pick out the exact type you need to cater to your preference, needs and personal taste.
Emergency savings account is like the 4 wheeler- This is the 4 wheeler that sits on the side of your garage. It has gas in it and can seat 2. It is not comfortable or ideal, but in a pinch it will get the job done until the other vehicle is fixed.
Online banking is like the hybrid or electric car- You no longer are dependent on going to the bank, like you no longer are solely dependent on the gas station. The hybrid saves money, and is efficient. It makes your life easier if you are willing to adapt to the changes. It can do everything a regular car can do. Online banking is safe, fast secure and saves time.
As you can see, my point is to make it clear that no one vehicle is better than the other. It all depends on how it will be used. It depends on your goals, your job, your family size, hobbies, and style preferences. Financial products are the exact same. You cannot have a checking account for everything, and there are some products that have a very limited purpose, but are the best for it.
Take the time to understand how all of these basic financial products work, and where that may fit into your lives. If you do that you will save money on taxes, gain money through compound interest, and be better prepared for what life will throw at you.
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