Understanding the Necessity of Savings and Investing
There is some mental fogginess between the terms saving and investing. Many people might confuse each as one and the same, but that is flawed. A savings account is not the same as investing in mutual funds, stocks, or bonds. One is a short-term, liquid asset, and the other is a long-term, wealth vehicle. Both activities are important and vital to financial success now and in the future.
The main issue with viewing both activities as synonymous is the lack of exponential growth in savings alone. Therefore, a savings account is not an adequate tool for saving for long-term expenses or future use, as with retirement. It is crucial to understand the differences of each vehicle as well as their individual strengths.
The Necessity of a Savings Account
Financial savings refer to money or monetary assets that are safe and liquid. When discussing safety, it is in terms of risk. A savings account does not pose a significant risk of financial losses, unlike the stock market that can be volatile, resulting in losses. Liquidity refers to the ease of access. While some savings accounts might come with withdrawal restrictions or penalties, a standard savings account does not.
Some people struggle to determine an adequate savings limit. The standard rule is to have a minimum of three months of living expenses in an accessible account and to have an additional three months’ worth in a high-interest, six-month fixed deposit or mutual fund. Having this amount in savings should protect you against future financial problems or losses, like medical emergencies or unexpected expenses.
Finding the Right Time To Invest
Many people want to invest money, but they often struggle to find the right time. First off, there is no precisely right time for investing. The best time to invest is when you have enough money in savings, following the rules above. Once you have your savings set, you need to determine the type of investments you want to make, and the type of investor you want to be.
What is your level of risk? Are you young, allowing for some financial gambles, or are you retired looking to sustain your current nest egg? Younger people can look for riskier investments, like stocks. Older individuals or those approaching retirement should turn to mutual funds or government bonds, items with less inherent risks, and promised growth. However, if you started investing later in life, there might be a necessity for a high-risk portfolio. Unfortunately, no one can tell you what type of investor you are, they can only offer advice, although make sure you are only taking the advice of licensed, professional financial planners.
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The bottom line is financial planning is about finding the balance between savings and investing. Your savings will consist of accessible and liquid assets, and your investments will often encompass long-term growth strategies. The key is to diversify so all your eggs are not in one basket, reducing your risk of financial losses.
What kind of investor are you, a risk-taker or someone who plays it safe? Leave a comment below and explain your savings and investment strategy. Help the rest of the community by keeping the conversation moving.