There are only two vehicles that can ply the road to wealth creation; Savings and Investments.
There are only two vehicles that can ply the road to wealth creation; Savings and Investments. If you’re going to take your wealth-building and wealth management journey seriously, you must master the principles of saving and investment regardless of what your income currently is.
Seeing that savings and investments are viable tools for building wealth, the issue should not be which of the two you should be doing, but rather, how you can take advantage of savings and investments to achieve financial freedom.
Saving is setting aside a certain amount of money regularly (weekly, monthly, bi-monthly e.t.c.) to cater to future needs. Investing, on the other hand, is putting money into assets that have a good probability of increasing in value over time, thereby making you wealthier in the long term.
Although they both involve setting money aside, they differ from each other in a few ways:
1. Investments involve a greater element of risk than savings. The risk with investments is that you could lose the capital (the money you invested) due to fluctuations in the markets and the general economy. In the long term, savings is always riskier because your capital will suffer a significant loss of value. You can also lessen your risk exposure if you diversify your investment portfolio by purchasing different assets like stocks, ETFs and bonds.
2. Savings generally have a lower rate of returns/interest compared to investments. Although investments involve greater risk, they have the potential for higher returns. In a sense, your money is growing by itself.
Now that we have established a baseline, we can consider the intersection between them and how we can properly leverage both concepts.
One truth; you cannot invest without being a disciplined saver. As exciting as it might seem to jump into the stock market and purchase stocks of your favourite companies, it might turn out to be a sour move if you are not grounded in saving. This is because you could make two big mistakes:
I. Buy stocks with money you ought to have saved – money for short term goals like buying a car, wedding preparation, travelling, e.t.c.
II. Selling off your stocks at the first sign of “trouble”
To avoid these rookie mistakes, you will need to implement some new financial habits. First and very important, is to keep savings at the front of your mind, that is, save first then spend. Think of your savings as your payment to yourself; take out your sayings from your earnings then spend the remainder on your living costs. When you restructure your finances like this, you will find that you can live without certain expenses you would normally incur if you had a lot of money on hand. A practical step is to set up automatic transfers to your savings account as soon as your income gets in. Experts recommend that at least 20% of your income should go towards savings. You can tweak the amount according to your financial commitments per time, but the important thing is that you set your savings aside regularly.
Also, track your spending. Monitor the things you spend money on so that you can identify the unnecessary expenses that eat into your finances and make the required adjustments. These are small changes you can make that will have a lasting impact on your overall financial standing.
Having identified some ways to ramp up your savings and by extension, your investment fund, we will say that it is important to have a healthy savings account that you can use to serve your short term goals and other needs that may arise. Investments are largely a long term play so it will be counterproductive and unprofitable to liquidate your positions every time you have to cater to a financial need. You could lose more money that way. Investments ought to be left to do what investments do best – grow and compound interest
As earlier stated, investing – particularly buying stocks on the stock market – is an in-road to achieving long term wealth. For instance, if you had saved $20 in 2010 and left it over till 2020, at 3% interest rate, you would have about $26. Alternatively, $20 invested in 2010 could be $200 in 2020 if you had put the money in the right assets like stocks, exchange-traded funds (ETFs).
Saving money is good, but investing is beneficial in more ways because it helps you accrue substantial returns in the long term and cushion your funds from the effects of inflation. The stock market returns an average of 10% annually, so your invested capital can increase by many multiples over time if you invest in the right companies.
You don’t need to wait until you have a boatload of money to start buying stocks. Start small, but start now! What you have is just enough. Remember, little drops of water make a mighty ocean. Compounding interest is the beauty of investing; it is simply when the money you invest starts earning money. So, the sooner you begin, the more time your earnings have to compound. For instance, if you invested $100 in Amazon’s IPO in 1997, that investment would have been worth $129,186 in February 2020.
Again, it is important to invest with a long-term period in mind (at least 5 years). Over a year or two, you may notice some downturn on your investments, but on a longer timeline, the stock market and great companies get bigger and more profitable. This means better returns on investment for you.
Bamboo offers investors a practically seamless way to use your earnings to purchase stocks in service of your future. With as low as $20, you can start investing and taking steps towards your financial goals.
Do not wait to invest. Time is the greatest opportunity to grow your money and to meet your goals.
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