Saving and investing are important financial decisions that can ensure financial security at all times when done correctly. They work together to keep you financially buoyant all year long. However, not everyone is well-equipped to save and/or invest properly. Sometimes, people go bankrupt in the process.
One of the worst financial decisions ever is spending all the money you make without saving or investing. Irrespective of your source of income or the amount of money you make, it is possible to save and invest, even though it may be difficult for smaller incomes or when you are already in high service debts.
This post aims to open your eyes to the essentials of saving and investing. I believe this knowledge will equip you to reap the financial benefits of saving and financial investments.
What is Saving?
Saving is the process of setting aside a part of one’s income and using the rest to meet one’s financial obligations including needs and wants. Needs are basic requirements that are essential to livelihood, while wants are optional desires that can afford to wait if resources are not available.
Saving money is an active process requiring one to consciously keep a part of their income for future needs or investments. This reserved portion is known as savings.
What is Investing?
Investment is the act of putting money into a venture, scheme, share, stock, or property for the purpose of making profit. It is the act of putting money to work and expecting returns from it.
Investment can be seen as a type of saving in that it converts hard money into something else of value, which can then be exchanged for profit. In saving, the value of the money is in the purchasing power of the money itself but in investing, the value of the money is in the asset on which it was invested.
While there are risks in both saving and investment, the risk volatility in investment outweighs that of savings. This means you are more likely to make bigger profits or incur higher losses within a short time in investments than in savings.
Here is a simple illustration. The power of money is in how much goods or services it can purchase. By increasing the price of goods, you automatically reduce the value of money, but if you own the goods directly, increasing its prices in turn increases the value of the money you used to purchase it.
Why You Should Save Money
Of the reasons why you should save money, here are the most important reasons to start saving today.
- Saving money offers you a financial safety net when have an emergency need.
- Saving money helps you curtail wasteful spending and act more financially responsible.
- Saving money can help preserve and/or improve the value of money, especially when you save in an interest-yielding savings account. This is a form of investment.
Important Reasons To Invest
When you invest, you make your money work for you. Here are some important reasons to invest your money.
- Investing can also preserve the value of your money when you purchase a profitable asset like land that can increase in value over time.
- Investing can potentially give you an alternate stream of income.
- Investing money helps avoid the effects of inflation and currency depreciation as your assets would continue to increase in value even when there is currency fluctation.
Saving Vs Investing: Which is more preferred?
Most people primarily save money to raise funds for something they plan to purchase, or for financial backup in case of contingencies. Saving money will help you develop your financial accountability and cut down on unnecessary spendings.
It also gives you a sense of financial wellbeing when you realize that you have some money in the bank. This alone can keep you psychologically satisfied and happy.
However, in comparing between saving and investing, the later is preferred for the following reasons. Money saved in a savings account is available for anything, and you may be tempted to use it for frivolous purposes at any time. In a world of global inflation, money loses value faster than assets. It would be wiser to invest rather than save.
Thus, if you really want to make profits or create more streams of income, investing is a better way to achieve that.
Simple Tips for Saving and Investing Effectively
Whether you save in the bank, a piggy, or any saving platform, or you are interested in making investments, these tips will help you make informed decisions and achieve your saving and investment goals. Many of these tips are adapted from the US Securities and Exchange Commission (US SEC).[1]Saving and Investing Roadmap – US Securities and Exchange Commission.
1. Make a financial plan
A financial plan refers to what you are saving for or what investment you want to successfully invest in. For example, saving to buy a house or investing in the stock market. You need to have a clear plan for your savings and investment as this will keep you motivated at all time.
To make it more interesting, set a time target for your saving and investment plans.
2. Know your financial situation
Before you save or invest, you need to know your financial situation. How much do you have in all your bank account or in hand? Are you in any debts? Do you have any debtors? Having a good idea of your financial statement including debts, assets, and liabilities, will make more your likely to be successful in your saving or investment journey.
The above analysis also makes you discover unprofitable behaviours like impulse buying and lack of financial self-control that can hamper your success in saving and investing.
3. Know your income and regular expenses
The next step in saving or investing is knowing your income and expenses for the previous month. You want to have an idea of what comes and and goes out of your purse monthly. If you have a family, write out your family income and expenses for the previous month. This gives you starting place in your saving and investment.
4. Make a budget and allocate a portion to saving and investment
Having known your net monthly income and expenditure, you need to make a budget for the current month. This should include your basic expenditures, savings, luxury, and investment.
If you are new to budgetting, I recommend the 50-30-20 rule of budgetting until you can find a more suitable method based on your financial status. The 50-30-20 rule specifies that 50% of your net income be allocated to your basic expenditure, 30% to luxury, and 20% to savings, investments, and debt repayment.
This template helps you balance your needs against your wants, investments, and luxury. However, you are at liberty to make allocations using other sharing formula you deem better for you based on your financial status and plans. In any case, you should avoid spending too much on things that are not very “essential”.
5. Pay off credit card debts or other high-interest debts
High interest debts are typically described as any debts with interest rates of 8% and above per month. They refer to any type of debt that carries a relatively high interst rate compared to other forms of borrowing.
To succeed in saving or investing, you must first commit to paying off high-interest debts. If your goal of saving or investing is to preserve your money and/or make some profit which I presume is the case, you don’t want to leave high-interest debts active as they can effectively neutralize your money’s value or the profit you make elsewhere.
You can decide to use a percentage allocation every month to service your debts until you fully clear them. Once they have been cleared, you can then fully commit to your saving or investment strategies.
6. Cut down on unnecessary expenditures and impulse buying
Financial discipline is the price you have to pay to attain financial freedom. Learning to be discipline yourself and cutting down on unnecessary spending is important for your financial growth.
Budgeting as discussed above can help you apportion your income and put it to strategic use. You need to know the difference between needs and wants, what should wait and what need should be met.
While many people make budget, not everyone adhere to their budget prescriptions. It takes discipline to stand on your budget and not spend beyond what you allocated to any domain. This is why you need to train yourself to avoid unneccessary expenses and impulse buying.
7. Learn to borrow from yourself
You start getting richer the moment you start deciding what your “personal money” is and what is not. You should not have all the money you have to yourself even though it’s technically all yours.
Whatever you have allocated for saving or investment is no longer free from your personal use. And whatever money comes from your business or investment is also not your personal money. If you strongly need to take from any of these money, borrow it with the mind of paying back as though you borrowed from the bank or someone else. You may pay back with interest if you may, but the bottom line is that you pay back.
8. Save as fixed deposit or investment accounts
High-interest-yielding accounts like fixed deposit or investment accounts are ways to preserve your money and make profits from it in a short time. Profits from conventional saving accounts are too negligible to be considered significant. However, there are various platforms where you can save as fixed deposit or investment saving.
While saving discourages you from spending extravagantly, fixed deposit and investment savings also gives you profit in the process. Thus, these are options you need to consider in your saving and investment plans.
9. Investment is key
Having established that investing money is better and more rewarding than just saving, one should consider investing as much as possible. Investments carry a level of calculatable risk. And once you determine what the risk is, you can go ahead to make the investment if it is something you can afford to bear.
Investing is a better way of saving money as it not only preserves its value but also add significant profits to it. You can invest is commodity marketing (retail, wholesale, or middleman), landed assets and real estate, financial investments like stocks, bonds, or foreign currency arbitrage/brokerage, etcetera. A true investment gives you a risk value and profit margin and leaves you with a decision.
To reduce investment risks, you can consider diversifying your portfolio. That means spreading your investment into as much portfolio or instruments as possible. This way, you avoid putting all your eggs in one basket. And you should avoid investing all your money at once. Instead, consistently add new money to their investment over time.
Investing will always be better than saving because it also protects your money against inflation.
For example, you save $50 in the bank to grow at an interest rate of 2% per month ($1 every month). By the end of one year, you would have $62 in total, assuming you left the money untouched throughout the period. Now, the $12 dollar increment at the end of the 12 month period is usually not enough to keep up with the inflation rate through that same period. Can $62 buy what $50 could buy a year ago?
10. Get as much information before investing
Before you proceed to venture into any investment, you need to equip yourself with as much information about it as you can. This information includes the risks, opportunities, genuiness and credibility, as well as the security of your investment.
Important questions to ask about an investment include:
- What is this investment about?
- Is this investment legit or is it under a registered agency?
- Have investors complained about it in the past?
- Have the owners been in trouble in the past?
- Does the business unit have a permanent location?, etc.
These questions help you determine which investment opportunities are worth your money and which are not, especially when it involves a thirdparty investment platform or group.
Another way to access risks and proper information about an investment is to consult investment experts for advice. These professionals are able to carefully analyze a business opportunity using their knowledge and wealth of experience to guide you into making profitable business or investment choices.
The Importance of Risk Taking in Investment
Risk taking is an important ‘skill’ every investor must develop. No investment is without risks but effectively navigating through risks is what makes you profitable in the long-run.
Risk taking is not just a mere display of bravery or stupidity. It is being able to see an opportunity, know the risks involved (risk of losing your money/investment), and determine if it is something you can afford to take. Also, the risk should be worth-taking when compared against the profit. But remember, you should not stake more than you can afford because you are looking for exorbitant profits.
Risk taking comes with the acceptance that there is a possibilitly of losing your money while chasing profit. But when that happens, you are shielded against losing more than you can afford to. You want to be able to gain more than you are losing, such that the few losses you make are as minimal as possible.
Common Reasons People Fear To Invest
Not everyone is comfortable with investing. The idea of making investments sometimes give some people chills. Here are some common reasons why you may fear to invest. We have addressed some of these problems in the sections above.
- Inadequate knowledge about the investment opportunity.
- Unwillingness to invest, or an obsessive interest to save only.
- Lack of understanding of various types of investment areas to invest in.
- Insufficient or unavailable capital.
- Sole belief in the traditional savings system.
- Irration fear of taking risks (which is something you should learn to overcome).
Conclusion
Saving and investing are two ways to protect the value of your money and gain financial security. Incorporating these tools into your financial plans can increase your chances of being financially successful.
Here, you saw some effective tips to save and invest. It was also worth noting that making investments is better and financially wiser than just saving even though there are risks involved.
While most people fear taking risks, you should instead learn ways to manage them and make investing a part of your financial life. Doing so will help you create alternate streams of income and become truly rich and gain financial freedom.
FAQs on Saving and Investing
How can I start saving and investing more?
How much should I save per month?
References
| ↑1 | Saving and Investing Roadmap – US Securities and Exchange Commission |
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