How to Find the Balance Between Saving and Investing
Before you start your journey to creating a foundation of wealth and discovering financial independence, it's critical that you understand the basics of how building wealth works. One of the main keys to this is knowing that saving and investing your money are two related things; however they are also independent processes. Another key is to find the balance between investing and saving in order to find the sweet spot that will maximize your financial growth.
What is Saving?
Saving is the due process of putting money aside in a very safe, as well as liquid accounts or securities. This can include a checking account, savings account, FDIC insured, US Treasury Bills, or a short-term certificate of deposit. The main goal for this type of fund should be to preserve your capital, as well as a secondary goal of keeping pace with the inflation rate.
What is Investing?
Investing is the act of using capital in order to purchase an asset that you believe will generate an acceptable and safe return over a certain amount of time, which will make you wealthier every year. Investments include everything from investing into a small business, rare wines, stocks, mutual funds, bonds, antiques, real estate etc. Making good investments are the best way to grow wealthy; however they can take years to work out due to the fact that we live in a very uncertain world.
How Much Should You Invest vs. Save?
Saving should always come first. It should be thought of as a foundation for your financial house to be built on. The reason for this is very simple; unless you are the benefactor of a large amount of money, your savings will give you the capital that you need to put into your investments. As a simple rule to follow, your savings should be large enough to cover your personal expenses, which include your loan payments, mortgage, insurance costs, food, utility bills, clothing etc. for at least half a year. In this way if you find yourself unemployed then you will have enough time to adjust your lifestyle and find a new job without being under a huge amount of pressure. On top of this, anything in your life that requires a substantial amount of cash should be driven by savings not by investment. For instance, the stock market can be very volatile in the short-term, and could in fact lose over 50% of its value in one year alone, and so only after you have a substantial amount of savings in place should you look into investing your money.
The one exception to this rule is if you decide to put your money into a 401(K). This is due to the fact that you will receive a huge tax break for putting money into a retirement account, and will have your funds matched by your company, which basically means free money that is being given to you.
It may seem like a tricky task now, however every self-made person who became successful had to start by earning a salary and spending less money than they earned, in which they put to work for them in projects that brought back interest, rents, and dividends. Remember that they are no better than you are, and if you put your mind to it, you too can act as savvy with your money and reap the rewards that come with being disciplined. At the end of the day, saving and investing your money comes down to very simple math that anyone can do with a little practice.