Saving money is essential for everyone, and investing is important for many. But how can you decide when you’ve saved enough and should invest? What if a great investment opportunity comes along and you haven’t saved as much as you should yet? Since investing can sometimes provide a bigger return on investment, wouldn’t it be better to start investing before saving and take the windfall made on the investments and use that as savings?
Especially with the recession that is slow to recover since 2009 and record unemployment rates since 2009 that are also slow to recover, many Americans are realizing how little they save and how badly this affects their life when a job loss occurs.
There are many misconceptions regarding who and when to save or when to invest. Let’s dig into them.
1. Just starting out and living paycheck to paycheck?
This is definitely not the time to start investing, but starting to save is absolutely essential. If you are fortunate enough that you are starting out with a company that has some form of a 401K or retirement investment account, you should definitely sign up for that and work your way up to the highest percentage of your paycheck in which your company matches to receive the greatest benefit.
However, don’t start out with the top percentage when you have no savings. Be strong enough to ignore money-wasting activities and purchases and take that percentage and put it directly into a savings account that you absolutely do not touch.
Once you have saved at least three months worth of income (you lose your job and can still pay ALL bills for three months) then you can increase your percentage into 401k. For example, if your company matches up to 5%, start with 1% and put the rest in savings. Once you get two months of income saved, increase to 2%. After saving three months worth of income, increase to 3% and put the rest in savings, and so on until you have reached the top matching percentage and you have six months to a year’s worth of income saved.
The idea of saving is money that you put away to cover costs in case of an emergency or until an event approaches such as college tuition or retirement.
2. Have a family, good job, working way up the ladder of success?
It’s time to invest assuming that you have already completed the savings steps above. Even with the severe ups and downs of the stock market, taking a look at a long-term view of investments over the course of 25-30 years, overall, people are going to still realize an increase for the most part.
If stocks dip, don’t panic and pull all your money out of investments. You’ll only hurt yourself in the long run. If you are at least ten years away from retirement, leave investments and wait for the market to balance itself out. You can certainly make small changes to your investment portfolio, but it should not be done unless you are in the business of the stock market and investments yourself, or you have great financial advice from someone who is not benefiting from the decisions they “help” you with in investing.
3. Retirement is now a bigger light at the end of the tunnel?
Now is the time to move your investments into a more solid growth and holding pattern in less risky investments. You want to move your money into investments that are guaranteed to increase even if it is a small increase, or at least guaranteed not to lose your original investment. You do not want to be in a high-risk portfolio at this stage of life and a sudden drop in the stock market could take too long for you to recover and live at your current standard of living level.
It is also a great time to choose long term care insurance while you should still be in relatively good health, but closer to the age where you may need extended care from time to time.
Many surgeries such as knee and hip replacements will start off in the hospital for the vital care in the few days following the surgery, but then most will move into a nursing care facility to complete the physical therapy involved in getting one back on their feet. It’s less costly for the hospitals, insurance companies, and ultimately you.
However, the long-term care insurance could add a layer of financial protection if there is any gap in coverage through your private health care or Medicare plans.
The clear difference between saving money and investing money is the possible need for the funds in the near future. Most investments do not have anything shorter than a 5-year span where you can earn a measurable return on your financial investment. In fact, if you withdrawal the money out of an investment early you will almost certainly experience a loss.
Typically the percentage of investment to savings will correlate with your earning potential, and the amount of time you have left before there will be a need. The necessity for a base savings of 3 – 6 months of living expenses is key to any financial plan where you have money in a liquid (easily accessible) account.
If you still have a considerable amount of time for earning potential, you will then contribute to investment products you are comfortable with. The “risk assessment” for individuals early in their career may be higher than those in the twilight of their working career. As the event you have been saving and investing for approaches, you will take less risk, and liquefy into a more savings-based and fixed environment to accomplish your goal without penalty or risk.
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