One of the common questions asked by anyone starting their financial journey is: is it better to save or invest? What comes first? What are the risks of either saving or investing? While we can agree that both of these practices are vital for financial growth, it is important to understand the saving and investment relationship so you can manage your money better and build long term wealth. In this article, we will look at why investing is better than saving or vice versa and how you can start saving for an investment today.
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Saving And Investment Relationship
So, interest or dividends? For starters, it is obviously good to do both. However, if you want to properly weigh your options, then here is a good understanding of how to go about it.
When it comes to saving money, you are simply stacking money to cater for you now. When you save money, you do not practically intend for it to grow. You just put it aside to help you need to access it for emergencies or even expected expenses. Having a financial cushion is very important and you can prioritise your savings especially when you do not have an emergency fund, planning for a vacation or even planning a big purchase. The bottom line is that this money is being put aside for later use, be it in a savings jar, under the bed or in a bank.
With investing, you put money aside for future use. Investments take care of you in the future. When you invest, you put money in assets such as stocks, properties/real estate or even a business, in order to generate more income. You can live off this income or pass them down generations. Investing is a good option especially when you have a topped up emergency fund, you do not have any debts holding you back or have long term goals that require long term financial planning e.g retirement.
What comes first? Saving. You need to properly plan for the investments you want to go into. The amount of money you will need to start investing will depend on the type of investment you have chosen. For example, investing in the stock market is quite affordable, than let’s say, buying real estate property. Building capital needed for investments first will help you navigate the investment industry easily.
That said, here are some tips to help you get started on saving for an investment:
How to Save For an Investment
1. Write down your financial needs and goals
The first thing you need to do before you start saving for an investment is to identify your financial needs and goals. Why do you want to start investing? How much money do you have saved for the investment? Have you built your emergency fund to help you invest comfortably? What type of investment do you want to go for? Once you understand your investment costs, you can know how to allocate your investment assets. Remember, when you know your financial needs and goals, you are able to save with a clear vision in mind.
2. Create a budget
Creating a budget is another important step that cannot be overlooked when you are saving for an investment. Since this will be an additional “expense” you’ll need to slot it in your expense list and allocate the amount of money that will be going towards saving.
Creating a budget helps you gain a clear understanding of all your sources of income including salaries and bonuses, as well as all your other expenses. If along the way you realise that you have way too many unnecessary expenses, you can cut them down. Reducing your spending will help you save more towards an investment.
3. Set savings goals
Setting a savings goal will help you stay focused and motivated on the savings plan that you have for an investment. Like I said, for some investments, you do not need a lot of money to start investing. Once you have identified your investment of choice, decide how much money you want to save for your investment and set a deadline to achieve that goal.
Depending on your investment of choice, you can, say, save Kes 5,000 to start investing in the stock market. HisaApp is a wealth management platform that allows you to invest in the US stock market with a minimum of $5. Once you start saving, you can gradually grow your savings and then later be able to invest in what you want at a specific date. Always remember to apply the S.M.A.R.T rule as you set your savings goals.
4. Open savings account
After setting your saving goals for that particular investment, it is time for you to open a savings account. Opening a separate and locked savings account is the best route to follow if you want to save for an investment faster. You can open your savings account at the bank or even opt for mobile money saving apps that make saving money easier and very convenient. Once you have opened a retirement savings account, you can start depositing your savings to your account and watch it grow over time.
5. Automate your savings
When you give up control of your savings for an automatic process, you’ll have so much ease saving for an investment. Direct deposits from your paycheck to your savings account to your investment account will help you avoid the anxiety that comes with unexpected expenses that may prompt you to divert your funds. Your money will always be saved no matter what. This allows you to save your money faster and in no time, you’ll have enough money for an investment.
6. Invest in a diversified portfolio
After saving enough money, it is time to start investing. As you invest, remember it is important to build a diverse investment portfolio, thereby you get to spread your risks. For example, you can build your investment portfolio by including stocks, bonds, mutual funds or even your own business. Diversifying your portfolio will not only help you reduce risk, but also increase your long-term returns.
7. Stay disciplined
Saving money is a great financial habit that should be learned by any person at any stage in their lives. At the end of the day, what really matters is not how much money you can save, but really how consistent you are with saving. Discipline is key. Stay committed to your savings goals and keep investing even when the market is down. Investments are a long term plan and you should be ready and willing to be consistent as you save for the investment of your choice.
Saving for an investment needs you to have a plan, practise patience and be disciplined. When you identify your financial needs and goals, creating a budget, automating your savings and also cutting your expenses, you can start building your investment portfolio in no time. Don’t forget to start small and also to diversify your investments if you want to have a more secure financial future.