Have you ever wondered where are the good tips for saving and investing money? How do people know which is better, Saving or investing? Or are they both equally important? In this tips for saving and investing money post, we will discuss why both are important and why you may consider one over the other. Just to be candid, I am not a financial advisor, this information is purely based on my experiences and opinion. There are many certified financial professionals that would be able to go into as much detail as possible. First though, I would like to discuss the multiple benefits of saving and investing.
Saving and Investing Early
No one really wants to talk about saving money or a savings account because it’s boring. Plus, there are so many books or classes that talk about saving money and it is almost saturated. Personally I like the books ‘The Millionaire Nextdoor‘ and, ‘The Richest Man in Babylon’. They are not your typical budgeting books but offer great concepts.
Benefits of Saving and Investing Money
I’m not sure about you, but when I think of savings, I think of my grandparents, who had a savings account at the local back and consistently gave money to the bank for a small portion of interest. For whatever reason, we also think of saving as something that we will do later in life. Well that couldn’t be further from the truth. What I would like you all to consider, is changing the mindset on savings.
A major benefit of savings or investing is the ability to store usable cash for future growth. This can be for either a personal business or larger investments. I read a book a while ago which really changed my mindset. I’m not sure if he created the concept, but the idea is to consider savings as storage. I like this because storage indicates that we are storing this for a better use.
Storing for Future Investment
If you think of savings as storing, it may help with the concept since “saving” sounds like something we can’t touch and therefore makes it taboo. Typically, if it is taboo, then we tend to want to spend it even faster. I would encourage you to consider it as a storage account for a future investment.
If you focus on consistently challenging yourself to invest or store a portion of your income every time you get paid, you get into the habit and won’t necessarily feel like you are depriving yourself of things. Furthermore if you put money away early on when you don’t need it, you may have quite a bit later on to use for something you do need. I have below five specific benefits to investing early rather than later.
Investing Early Reduces Risk
If you ever watch the stock market, typically you will see a chart whenever someone refers to a stock price. The chart references a time horizon. This is how the company has performed over a certain time. The longer you invest, the better chance you have to take on any risks of the stock going down. If you are looking for a great book that will give you multiple tips for saving and investing money, I would highly recommend the book ‘Unshakeable: Your Financial Freedom Playbook‘ as it is a great guide to investing.
Investing Early Starts Compounding
We just talked about the timeline and risk, but another reason to invest early is start gaining from compound interest. Say a 25 year old invests $2,400 dollars annually over 40 years, which equates to $96,000 dollars total. If we assume an average growth rate of 8 percent, their investment would have grown to over $620,000 dollars by the age of 65*. Only $200 dollars per month, less than $7 dollars per day.
Conversely, a 35 year old invests $4,800 dollars annually for 30 years so they can retire also at 65. Now the 35 year old invests $144,000 dollars total over the 30 year period. Assuming an average growth rate of 8 percent, their investment would have only grown to $543,000. In conclusion, the 25 year old spent $48,000 dollars less and ended up making $80,000 dollars more and they both retired at the same age. Some of these concepts can also be found in a book, ‘The Everything Guide to Investing in Your 20s & 30s‘.
Keep in mind this is just a model, if you are starting to invest after 35, all hope is not lost. My point in this section is to start today. Time is constant, in that everyday is another day where you could miss out on investment gains. Ideally, we would want to start sooner rather than later.
*Calculator found from Investor.gov.
Investing Early Improves Quality of Life
This really is more of a personal opinion in this section. I feel that if you focus more on the future and how to prepare financially, then you focus less on things that can cause high risk in life. Saving and investing early allows you to have a goal and something positive to look forward to. There is less chance of wasting the money on things that ultimately give you no gain.
Investing Early Leads to Better Budgeting
When the mindset shifts we realize that saving or storing money for a future purchase sinks in, it’s important to know how to effectively budget your expenses. I will go into budgeting in further detail on another post, but one trick I learned is an investment concept called the 40/40/20 rule. The goal is to be really successful managing money.
When you are able to live off of 20 percent of your income and you store 40 percent then the other 40 percent can unfortunately go to Uncle Sam. The highest tax bracket as of the article is 37%. That applies to any earners over 520k per year. I have heard people say live off of 10 percent of your income and I’ve heard others say 30 percent. Personally I like the 40/40/20 rule, but the point is you need to have a plan. And you need to have a budget.
Investing Early for an Emergency Fund
There are different schools of thought regarding “emergency funds” which consist of somewhere between 3 to 6 months of stored expenses. To be completely honest, I didn’t have a “emergency” fund until I was in my late 20’s. I’m not suggesting that should be your situation, but that is my experience. I also go into much more detail on an emergency fund and the pro’s and cons of having one. Please read this blog on Emergency Fund Savings: Do you need one? to understand more on that.
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Automatically Saving and Investing Money
Now that we understand how important it is to save and invest, I wanted to give you tips for saving and investing money automatically. This will make your life so much easier. Listed below are three ways that you can go on auto pilot for your savings and investments.
Auto-saving is one of the most underrated concepts out there. This is the concept that when you get paid, automatically either there is a direct deposit to your investment account or your savings account. This can also be combined with auto-investing. If you know that you are going to get paid every 2 weeks, then set up a plan to purchase an investment every two weeks that you get paid. I would suggest you talk to an advisor on how to get this set up. There are so many online brokerage companies out there that would happy to help.
Automatic Round ups
Rounding up for saving or investments is a great way to automatically save for future investing. Round up is a concept where you spend money on everyday items but the when the amount comes to something other than a whole dollar amount, the company will automatically round up your purchase and deposit the small amount into an investment account. Acorns is a company that I personally use for this and have been using for several years.
Lastly, my suggesting for auto saving is utilizing any company sponsored plan. Whether your company has a 401k, 403b, ESPP or some other type of matching / discounting savings vehicle. Those are benefits that should never be overlooked, especially if there is a matching program to any of them. A matching program basically gives you free money. Always max out your 401k to at least what your company offers as a match.
Conclusion
I hope you were able to find some additional tips for saving and investing money wisely. As with anything, investing and savings takes dedication and consistency. I learned many years ago that saving and investing can be fun. We must change our mindset from a constant consumer to a constant builder. Building financial freedom and a future is so much more rewarding than following the crowd and living for the moment.
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