The logical questions are: How much should I be saving? What is the difference between saving and investing? What are the safest methods for saving?
There is a huge difference between saving and investing. Both should have a place in your financial planning, but they have different roles. It can make a difference in whether you experience a bare-knuckle survival through a recession or depression or sleep soundly knowing you have spare liquidity on hand. Knowing the difference is vital to building wealth and finding financial independence.
Many individuals have lost everything in an economic downturn despite having wonderful portfolios because they failed to appreciate the role of cash in their calculations.
Making money for you is not always the first role of cash.
Knowing the basic differences between saving and investing may help. Saving involves putting cold, hard cash away where it is safe and liquid. Some successful money managers suggest keeping a lot of cash hidden on hand to be a source of quick availability. Savings should be in FDIC-insured accounts, including U.S. treasury bills. Money market accounts are good, but money market funds require a careful look at the holdings and structure. Savings should be immediately accessible so you can deploy them with minimal delay according to circumstances.
During the 2008-09 economic meltdown, some hedge fund managers actually had their spouses getting as much cash as they could from ATMs because it appeared that the entire economy was going to collapse. Not widely publicized, such activity nevertheless showed the depth of the concerns.
The objective in saving is to keep ahead of inflation.
Now, about investing. That’s a process of using your money to earn a return. There is more volatility in the process than in saving, but it is the basis for building wealth. Learning the tricks of investing is a process and many helps are available, including the book, “How to Start Investing.” Professional help is available if you are a real novice. The trick is to start. Learn as you go.
Stocks, bonds and real estate are the most popular avenues for investing.
So, given the differences, how much of your income should you dedicate to each of these money-management techniques? Obviously, the answer is individual, but the bottom line should be: “As much as you can,” even to the extent of sacrificing some of your immediate desires to maximize your savings and investment options.
Put savings before investments (unless you receive a sudden windfall such as an inheritance, etc.) A good savings cushion will fund your investments. The two primary purposes for savings are as a hedge against the loss of income, through a layoff, downturn, illness or for special purposes such as a house down payment, car or other big-tab item. Ideally, you should have six months of coverage for essential living costs. That will give you a sense of security that you can’t get from the market, which can be extremely volatile in the short-run.
You shouldn’t consider investing until your savings program will give you the assurance of being able to take care of emergencies and/or saving for the items that will take more than five years to pay for. Having health insurance should take precedence over investing as well. Without it, a single health incidence could wipe you out.
Savings and investing. Make both a matter for long-term personal financial health. But start with the savings.