Saving Vs Investing: How To Do It The Right Way

By saving and investing money the right way, you can produce enormous growth in your finances. Here are strong tips for saving and investing money the right way.

Saving

Saving and investing are important financial decisions that can ensure financial security at all times when done the right way. It is not enough to spend all the money you make daily, weekly, or on a monthly basis. A portion of your income needs to be set aside for saving and investing.

As humans, we are all tempted to live our lives in total luxury, spending all we earn and ignoring saving and investing. This is, by far, the worst financial decision anyone can ever make.

However, not many people know much about saving and investing the right way. Sometimes, even when they intend to save and invest, they find themselves unable to succeed in doing so.

Hence, it becomes necessary to shed some more light on the concepts of saving and investing and to show you ways to successfully save and invest while avoiding some common mistakes people make when trying to save and invest.

Differences between Saving and Investing

Saving is the process of setting aside a part of one’s income after spending and deducting the financial obligations from it. The act of saving is an active or deliberate process involving the individual setting aside a portion of his/her income.

Saving refers to the act or process of setting aside a proportion of your income or profits for future use. That proportion of income saved is known as savings.

Investing is the act of putting money into a commercial venture, financial scheme, shares, or property with the aim of making a profit from it. It is a form of saving but with the hope of making returns from it.

Investing refers to the dedication of an asset including money, time, and effort to attain an increase in value over a period of time. These assets invested are known as investments.

The primary purpose of savings is to raise funds for something or to provide a financial backup for emergencies. While investments are for making profits or creating more sustainable income streams.

Why You Should Consider Saving and Investing

There are many reasons why you should save and invest your money. Saving and investing money offers you a financial safety net when your primary source of income cannot meet an emergency need. They help you curtail luxurious and wasteful spending as could be seen when you have all your income to yourself.

Setting aside a proportion of your money for saving and investing can also help preserve and improve the value of your money. The way this happens for investing is straightforward: after investing in an asset, the price can increase in the same direction with general price changes. But for saving, you can preserve or improve the value of money when the power of the currency improves over time, or when you save in a stable currency.

Keeping physical or liquid cash in the bank gives you financial security when times are rough but that also makes the money available for anything you put your mind to, since you did not attach any purpose to it. In this case, it will be wiser to invest instead of just saving, as investments are more resistant to instabilities and fluctuations in the economy.

It, therefore, stands that saving is more beneficial when you simply want to reserve some money for future use or emergencies while investing is preferred for making profits and creating alternate and sustainable streams of income.

Tips For Saving Money

Whether you save in the bank, a piggy, or any other saving platform, here are the tips you have been waiting for.

1. Set a fixed percentage for savings

Saving is best done when fixed percentages are used. The 50-30-20 rule could help with this.

The 50-30-20 rule is a way to allocate money for saving and investment while still being able to enjoy some luxury. It states that out of your primary income, allocate 50% for your essential needs, 30% for luxurious wants, and 20% for savings, investments, and debt repayment.

Setting a fixed percentage for your savings gives you a clearer idea of the real value of your money compared to absolute values. For example, if you are earning $500 per week, investing $100 may look big but seeing it as 20% puts it in its right proportion.

2. Adopt a budget

While the 50-30-20 rule is generally recommended for everyone, different people still have their own systems of allocating funds to three domains in their financial lives. But whatever the proportion you allocate for expenditures, you need to adopt a budget for it.

A budget enables you to plan your expenditures against your available money for a given financial period. Now, say you have your 50% set for basic expenditures, a budget can allow you to plan where the money goes and where it does not. Read here to learn how to implement a periodic budget

3. Prioritize your needs

This is one thing a budget also helps you to achieve. Your wants/needs may not always be fully satisfied. There are some that you may not be able to cater to given the money in your hand. This is why you need to plan what enters or how much you allocate to what in the budget based on their order of importance.

Prioritizing your needs also mean that your budget need to have your most pressing needs accounted for. You don’t want to save so much you leave important needs unmet; that will make you unhappy and miserable even when you have some money to satisfy them.

Thankfully, the 50-30-20 rule also accounts for that. It allows you to save efficiently while creating sufficient space to get your own needs met.

4. Account for miscellaneous expenses

To save efficiently, your budget must be able to account for miscellaneous expenses so that you don’t have any need to fall back on your savings for such expenses. Your savings should be for unforeseeable expenses that your budget cannot easily service.

Your miscellaneous expenses form part of the 50% initially allocated for essential expenditures. And if you think that amount will not be enough for all your expenses, this is another place where you might need to cut your coat according to your cloth.

5. Borrow if you are going outside your allocations

You might say everything is your money but you need to be financially diligent. Whatever you allocate for savings and investments is no longer your free money. If you need extra money for something that is non-essential and does not meet the criteria for an essential emergency, borrow the money, don’t just take it.

And when you borrow, pay it back and if possible, do so with interest. You should know that money for your business or investments is not your “personal money”. You cannot afford to use it anyhow you like. You can only use the amount of money you pay yourself from the proceeds of your business or investment.

7. Investing is the best way to save

Saving money in a savings account, a fixed deposit account, or in your piggy is only a way to keep your money for rainy days. It does not give you so much profit in return and its value can depreciate slightly in the process.

Investing money not only saves it but also protects it from depreciation while also giving you alternate streams of income.

Take, for example, you save $50 in the bank to grow at an interest rate of 2% per month. By the end of one year, you would have $62 in total. Assuming you left the money untouched throughout.

While the money may seem to have increased, the increment usually does not keep up with the inflation rates. Prices of goods and services might have increased significantly within that period, such that $62 may not be able to buy what $50 could buy a year ago.

Tips on Effective Saving and Investing

The United States Securities and Exchange Commission (US SEC) published a guideline on how to save and invest effectively as an American resident. I will adapt some of these tips to apply to everyone else in this section.

No matter how much you earn, with the right information about available opportunities, you can save and invest the right way and become more financially stable.

Here are some steps to effective saving and investing adapted from the US SEC[1]Saving and Investing Roadmap – US Securities and Exchange Commission.

1. Make a financial plan

When you are saving, you need to have a clear plan of what you are saving for, e.g., buying a house, saving for seed capital, retirement, etc. Having a good financial plan for your savings will keep you motivated to save or invest until you achieve it.

You can also set a time frame to achieve your target(s). That way, you have a finish line you are working towards.

2. Know your financial situation

The success of any investment process depends on your preparedness and accountability as an investor. You need to have a good idea of your financial situation, your debts, assets, liabilities, etc., and be able to give a financial statement of your financial situation as follows:

Saving and Investing – US SEC

You are not only interested in your asset and liability statements. Examine yourself and get your mind prepared for investing. By examining yourself, you want to discover unfavorable behavior like impulse buying, lack of financial self-control, etc., that may hamper your success in investing.

After examining yourself, also know that you have all it takes to succeed in your investment journey. You only need to work on those things that can deter your success.

3. Know your income and expenses

After knowing what you own and what you owe, I mean your assets, liabilities, strengths, and weaknesses, you need to project into your income and fixed expenses per time.

Write down what you and/or your family earn, and also write out your expenses for the previous month. This will give you an idea of how much to budget for each recurring expense for the month and subsequently.

4. Make a budget and allocate to saving

Now that you have known the estimate for your net monthly income and monthly expenditure, it is time to draw out a budget to accommodate the expenditures you could predict for the new period.

Using the rule of 50-30-20, allocate 50% of your income to your basic expenditure. You can use a different proportion depending on your specific needs. But don’t forget to leave a portion for savings and investments.

5. Pay off credit card debts or other high-interest debts

To succeed in your investments, you don’t want to leave trails of high-interest debts behind. If you have any credit card debts, especially those with high-interest rates, pay them off as quickly as possible. The longer you hold these debts, the higher your liability will be, and the lesser the chances that your investment will succeed.

6. Cut down on unnecessary expenditures and impulse buying

Financial freedom does not come without some level of financial discipline, at the very least. You need to discipline yourself to cut down unnecessary spending as much as possible.

To achieve financial discipline, you can categorize your expenditures into needs and wants. Needs are essential to your living and comfort. Wants are not pressing or essential and can afford to wait.

7. Save in fixed deposit savings or investment accounts

Saving money in high-interest-yielding accounts like fixed deposit savings or investment accounts can help you protect your money and also get some profits from it. That can encourage you to save more and reduce extravagant spending.

Also, as noted earlier, profits from savings in the bank are usually not very significant for the time they are kept. Investing your money is, therefore, the better option among the two.

8. Invest!

Investing money is better and more rewarding than just saving it. Investment is simply the act of putting money or resources into an activity or business with the hope that it will bring you greater returns at the end of the day.

You can invest in stocks, bonds, foreign currency arbitrage/brokerage, commodity marketing (retail, wholesale, etc), landed assets, real estate, etc. While these may be riskier than simple bank savings, their returns are more rewarding in the long run.

Another way to reduce your risk and increase your profit is through “diversification”. This refers to a strategy of spreading your portfolio across different businesses or investments. That way, you are not “putting all your eggs in one basket”.

Investors also protect themselves from the risk of investing all their money at once by following a consistent pattern of adding new money to their investments over long periods.

9. Get as much information before investing

Not all investment opportunities are worth your money. You need to get as much information about an investment opportunity before you jump right in.

One way to do so is to consult investment experts for advice. Ask specific questions about the investment opportunities offered to you. The more you know, the safer you will be.

Here are some information you need to inquire about before investing a penny into any investment:

  1. Is the investment registered?
  2. Have investors complained about the investment in the past?
  3. Have the owners been in trouble in the past?
  4. Does the business unit have a permanent location, etc?

Questions like these help you decide if you can trust the investment, and also help you know how to maximize profits when you have decided to venture into it.

How To Take Risks When Investing

Risk-taking in investment is an important skill everyone investor must learn. While investments are riskier, someone who is good at taking and managing risks eventually ends up being the big boy.

For the record, risk-taking is not a mere display of bravery. Anyone can display bravery even if they are doing so foolishly.

Risk-taking is one’s ability to see an opportunity, identify the risk, and see if it is something they can take. Also, the risk should be a risk worth taking when compared against the profit.

Determining the value or the worth of a risk involves two important strategies. First, determine the quality of the risk, if it is genuine enough to yield the results it promises. If you cannot calculate the odds and see how you can navigate through it, that might be a worthless risk to take.

Two, determine the quantity value of the risk. How profitable will it be? If you need to face a very big risk for a very small profit, no one should tell you before you know that that is an effort in futility. Instead of “low-quantity” risks, channel your effort and resources into more lucrative and quality opportunities.

Risk-taking comes from the acceptance that investing is a learning process. You sometimes lose when you fall into worthless risks but as you learn more, you understand better how to take calculated risks.

Reasons People Fear To Invest

Here are some reasons why people fear investing.

  1. Inadequate knowledge about the investment opportunity.
  2. Unwillingness to invest.
  3. Lack of understanding of various types of investment areas to invest in.
  4. Insufficient or unavailable capital.
  5. Sole belief in the traditional savings system.
  6. Fear of taking risks.

Conclusion

Saving and investing are two ways to protect yourself and your family financially. These should be incorporated into your income for financial success.

It is better to invest than just save. Investments not only protect the value of your money but also yield more profits while creating alternative income streams for you.

People fear to invest their money because they are scared they might lose it all. The above tips on managing risks and investing will help you know when to invest and how to avoid financial losses.

That being said, save but invest too. Investments are riskier than simple savings but when done wisely and passionately, they are always worth it in the end.

FAQs about Saving and Investing

If you want to save more money or begin a habit of saving but you feel you can't afford to, the first thing to do is cut down unnecessary expenses. Then, break out between discretionary and non-discretionary expenses. Stay disciplined in your spending and use the 50-30-20 rule to allocate money to saving and investment regularly.

The 50/30/20 rule is a great way to split and allocate your monthly income. This describes that you should allocate 50% to your essential needs, 30% to wants, and 20% to savings and investments. Thus, it will be safe and wiser to save within 20% of your monthly income.

References

References
1Saving and Investing Roadmap – US Securities and Exchange Commission

I am a medical doctor, a seasoned writer and passionate blogger. Thanks to many years of trials, failure, and near successes. I am the founder of Knowseeker and our content are geared towards enlightening and making you a better and happier audience.

Leave a Comment