Saving and investing may seem like the same things, but they’re actually quite different. One must come before the other. You can’t start investing for growth without first having sufficient savings for immediate needs, unexpected emergencies, etc. Investing builds upon a foundation of sufficient savings. While the two concepts are closely related, the mindset used to approach each one is contradictory.
Saving Mindset: Save Like the Sky is Falling
Investing Mindset: Invest Like the Future is Bright
The saving mindset starts with the proper emergency fund. The amount depends on your monthly expenses as well as other planned purchases, or anticipated life changes in coming years. When you’ve saved (like the sky is falling), you’re prepared for the unexpected because you took seriously the importance of having that liquid savings on hand. I define an asset as liquid based on how quickly it can be converted into cash and whether it can be sold off to cash without taking on a significant loss. If you have to make a decision to sell an investment that you’ll lose money on due to poor stock market returns, then I don’t consider it liquid.
In my last post, I discussed what it means to be financially flexible. If you missed it, click here. Financial flexibility really starts with your savings. If you’ve prioritized investing over saving, where do you turn when you need money (when the unexpected comes up…and it will)? Having to draw from investments leads to a string of potentially costly decisions (tax-wise, locking in losses, permanently stunted long term growth, to name a few).
Just as you must be viewing saving like the sky is falling, you must at the same time view investing as if the future is bright. Two completely different mindsets, both likely happening simultaneously, with decisions being made on each that can contradict each other.
Investing is for the long term. If you can’t commit to a longer term time frame for these dollars, you shouldn’t be investing them. Likewise, it is important to know what your objectives are for your savings and investments and be sure not to intermingle the two. Establishing clear objectives for both and revisiting those objectives periodically will help you to keep both in the proper context.
For example, if you have accumulated considerable savings, above your emergency fund, and plan to use the excess for a down payment to buy a home or a car in the next 1 to 2 years, it is not prudent to invest that money. Investing for that short of a time frame is just too risky and that money needs to stay liquid. It may not make a lot of interest in the bank, but at least you know it will be there and ready for when you plan to use it, with no risk of market loss.
Next week: Strategies to Pay Off Debt
I’d love to hear from you! Let me know what you think! Email me at Christopher.Hull@CeteraInvestors.com or call me at 716-698-8196.