Saving and investing are two of the most important practices to help you achieve your financial goals. But if you are just starting out in your career, you may be wondering which one you should go for.
Saving is setting aside money for future use. For the longest time, people have considered saving the best way to secure their financial future. However, in recent times, savings accounts are no longer the only consideration for financial goals because of their low returns. Add inflation to the equation, and you might even lose money in the long run.
On the other hand, investing is taking some of your money and trying to grow it by buying things you think will increase in value. Investments have evolved in the past few years. What was once a male-dominated field is now more diverse and accessible thanks to emerging technology. You can now invest in the market using an app on your phone. With the wide variety of investment opportunities nowadays, it can be tempting for young professionals to take the leap and start investing.
Saving and investing have their own benefits. Starting early for both means you have more time to save up for big goals and see what type of investments work best for you.
Here’s a quick cheat sheet for the savings versus investment discussion.
If you want to secure your financial future, the wisest thing to do will always depend on your current situation. But, first things first: Savings should always come before investments.
Start off by building an emergency fund. This should cover three to six months’ worth of your living expenses. If you encounter unexpected expenses, such as hospital bills or car repairs, your emergency fund should compensate for this. It can also be your spending money if you find yourself between jobs.
Once you have completed your emergency fund, you can proceed to save 20% of your monthly earnings. Budget your expenses and savings. The extra funds left once you’ve accounted for everything can be allocated for short-term savings like a travel fund and for your investment.
You might ask yourself: When is the right time for you to start building your own investment portfolio? Is investing right for you? Or are you better off growing your savings account?
Think about your long-term goals. At what age do you want to retire? How much money should you have by the time you retire? These questions can help you determine your investment goals.
The general rule in investing is that the money you invest is money you don’t plan on spending in the foreseeable future. It’s meant to sit and earn over time. A good amount to invest each month is 10–15%. If you think this is too much for your budget or your risk appetite, you can lessen it and slowly work your way towards it.
After identifying your investment goals, look at the different types of investment. Some have higher risks, meaning these may either perform a lot better or a lot worse. Safe investments, such as bonds, have lower risks. They may have a lower return but don’t run the risk of losing much money.
However, remember that both high and low-risk products are still investments, so choose the one that best fits your risk tolerance. Recognise that all investments are prone to risk. For example, if you have stocks and the stock market doesn’t perform well, you can expect low returns for a certain period. On a positive note, your investments also have the potential to beat inflation rates in the future. Consider these factors when you’re exploring your investment options.
Starting early means that your money has more time to compound. Compounding is when you reinvest your invested earnings, and those begin to also earn. If you start investing now, your investment continues to compound until your 50s or 60s. Basically, you earn more than those who started investing at a later age.
Plus, when you invest at a younger age, you have less to lose if the investment performs poorly. You also have more room to make investing mistakes if you start in your 20s. If you make a mistake much later, you lose more, making it more difficult to recover from your losses.
Investing early also means you can cultivate better spending habits. Adding an investment fund into your budget allows you to be more mindful of your spending because of this allocation.
Fear of missing out or FOMO is the feeling you might get when you think your peers are having more fun, living more exciting lives, or experiencing things that you’re not. When you get hit by the feeling of FOMO, you might think you’re missing out on important milestones that others might have.
It may be tempting to take on debt to overcome the feeling of FOMO. You might swipe your credit card more to buy the latest gadgets or catch up on the trendy styles of the season. You might book that flight for a trip even though your budget doesn’t have the space for it. Or you find yourself saying yes to eating out even though you can’t afford it now.
All these experiences and material things are exciting and pleasant to have. But, if you go into debt to get them, then they are hurting your long-term financial goals. If you keep spending to keep up and feel included, you risk pushing yourself deep into a cycle of paying off your debt. Or if you’re paying for these upfront, you may end up pulling money from your emergency funds when you’re short on cash. And since you’re spending on these, you also leave less money for your savings and investments.
Consider your long-term financial goals when you’re tempted to spend on the latest trend. Sure, that new bag will make you happy now. But what about your future self? Remind yourself of the idea of delayed gratification. This is when you hold off on spending for your wants now so you can get a more valuable reward or asset in the future. What you don’t spend now will benefit you in the future.
Delayed gratification can also help you achieve your financial goals faster. If you’re planning to purchase a new home or car, you can hit your target amount more quickly when you don’t impulse buy new things. Delayed gratification can also come in handy if you need extra funds for repairs or hospital bills and don’t want to dip into your emergency funds.
Savings versus investments shouldn’t be a debate you have. These two work together to help you achieve all your financial goals. But while it’s good to plan for your savings and investments in your 20s, don’t forget to enjoy your hard-earned pay. Set aside a bit of “fun” money to spend each month.
Set aside a bit of “fun” money to spend each month. When you focus too much on saving for the future, you might feel greedy to save more or anxious about the performance of your investments. This can affect your mental health, so find a balance where you feel comfortable saving and spending. Your future self will thank you.
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