“I don’t believe in saving money, I believe in investing.” I have heard different variations of this statement time and again. The argument behind this statement is often the effect of inflation on savings. Let’s say inflation is 5%, but your savings are earning an interest of 2%, technically you have lost 3%. So why would any sane person put money away in a savings account? I shall give you 3 simple reasons why you need to save your money. Interested?
1. Emergencies
Emergencies are unavoidable. They often come unannounced and have the potential to wipe away your wealth in extreme circumstances. Because of this, it is wise to have money set aside for emergencies. This is where savings come in.
Money for emergencies should be saved and not invested. Why?
- Investments by their nature carry an element of risk. At the time of the emergency, your investment may have lost some value. As a result, you may have to dispose your investment at a discount in order to meet your emergency.
- Your investment may not be immediately accessible. Not all investments are easy to dispose e.g. land. Others may be easier to liquidate e.g. money market funds, but there might be a small time lag while the money is being moved around. This may force you to either get into debt or sell off your assets at a discount.
2. Fund Expenses
There are certain expenses that may cost quite a penny e.g. medical insurance, car insurance, holidays, appliances etc. Purchasing these items may hurt your cash flow if you are attempting to fund them at a go, from your monthly income. This may end up causing you a financial strain and you may be tempted to give in to the expensive “installment” payment options that the providers may have on offer.
Rather than do this, set up what is referred to as sinking funds. These are savings that are set up specifically to fund large expenses. All you need to do is determine your target savings amount and then determine how much you can be setting aside on a weekly, monthly or quarterly basis (depending on your income frequency) towards your goal.
These savings should be held separately from your emergency savings.
3. Investment Strategy
Trust me, this is not a contradiction!
Savings and investments are both necessary. However, whereas the purpose of investments is to help you grow your wealth, savings are more protective in nature. They help protect you from financial inconveniences and emergencies. However, they can also be incorporated as part of an individual’s investment strategy. How?
- During times of uncertainty, when you are unsure of whether to invest or where to invest, holding cash may be advisable. This is a strategy that is employed by fund managers when they are determining their next course of action. It may be a strategy you may want to employ as well.
- Some investments may require a lump sum. Savings may help you build that lump sum amount that would be required to give you access to your preferred investment.
Your Turn:
Due to their purpose, it would be advisable to keep your emergency savings in a bank savings account. This is due to the ease of access and the deposit insurance that is applied on bank accounts. However, you may want to explore other safe options for your other types of savings.
Have any questions? Feel free to reach out to us on email at mail@mirrorwealthcoaching.com.