Are you a spender or a saver?
If you chose the former, you are in the majority. According to a 2019 Charles Schwab survey, approximately 59% of Americans consider themselves savers. However, when compared to more recent findings, 63% of respondents in a similar demographic are currently living paycheck to paycheck.
There is a misalignment between the financial goals we set and the steps we take to achieve them.
Many of us are taught from a young age that saving is the quickest way to accumulate wealth and achieve financial independence. However, this is a myth. While saving is important in achieving both goals, making wise investments with your money makes them much more attainable.
Most people are afraid of financial loss rather than financial gain, which is understandable. When we work hard and are disciplined enough to forego consumption to save, the thought of losing our hard-earned dollars is understandably unsettling. As a result, we deposit our funds in an FDIC-insured bank account.
The problem is that the money we put into our accounts will almost certainly lose value. Savings account interest rates are so low that they can’t even keep up with inflation, which means our money loses purchasing power as we save.
But there is some good news. You can reduce the risk factor, increase the reward factor, and generate meaningful returns without feeling like you’d be better off in Vegas if you make smart decisions and invest in the right places.
Here are a few questions to think about as you begin.
Why should you invest?
Saving versus investing is a frequently discussed topic in financial circles. However, they are two sides of the same coin.
Saving is an essential part of the financial toolbox when it comes to wealth creation — not because it creates wealth on its own, but because it provides the capital required to invest. At the very least, investing allows you to keep up with inflationary cost-of-living increases. The possibility of compounding interest, or growth earned on growth, is the most significant advantage of a long-term investment strategy.
How much should you save vs. invest?
Given that each investor enters the market for a variety of reasons, the best answer to the question of how much you should save is “as much as possible.” As a general rule, saving 20% of your income is a good place to start. Although more is always better, I believe that 20% allows you to accumulate a significant amount of capital over the course of your career.
Initially, you should use these savings to build an emergency fund equal to three to six months’ worth of regular expenses. After you’ve accumulated these emergency funds, invest any remaining funds that aren’t being used for specific short-term expenses.
Invested wisely — and over a long period — this capital can multiply.
How do investments work?
Understanding the market: In the financial world, the market refers to the location where you can buy and sell stocks, bonds, and other assets. Do not use your bank account to enter the market.
You must first open an investment account, similar to a brokerage account, which you will fund with cash and use to purchase stocks, bonds, and other investable assets. Firms like Schwab and Fidelity will allow you to do this in the same way that you would open a bank account.
Stocks vs. bonds: Publicly traded companies use the market to raise funds for their operations, growth, and expansion by issuing stocks (small pieces of the company’s ownership) or bonds (debt).
When a corporation issues bonds on the market, They are seeking loans from investors to fund its organization. Investors purchase the bonds, and the company repays them plus a percentage of interest over time.
Stocks, on the other hand, are small pieces of a company’s equity. When a company goes public, its stock can be bought and sold on the open market, indicating that it is no longer privately held. A stock price reflects the company’s value in general, but the actual price is determined by what market participants are willing to pay or accept on any given day. Because of the price volatility, stocks are more volatile than bonds. If a company receives bad news, people may want to pay less for shares than they did previously, lowering the stock price. If you paid a high price for the stock, you risk losing it if the price falls.
Stocks are also riskier because when companies fail, bondholders get their money back whereas stockholders do not.
Making (and losing) money: Depending on the purchase and sale price of whatever you buy, you make or lose money in the market. You make ₹5 if you buy a stock at ₹10 and sell it at ₹15. You lose ₹5 if you buy at ₹15 and sell at ₹10. Only gains and losses are “realized.”
or counted when you sell the asset — so a stock you bought at ₹10 could fall to ₹6, but you’ll only “lose” ₹4 if you sell it at ₹6. Perhaps you wait a year and then sell the stock when it reaches ₹11, earning ₹1 per share.
Are you investing reasonably?
Now that you understand how investing works, consider where you want to put your money. As a general rule, the best risk an investor can take is a calculated one.
But how can you possibly be calculated? How can you tell the difference between a smart investment and a risky investment? To be honest, the terms “smart” and “risky” are relative to each investor. Your circumstances (e.g., age, debt level, family status) or risk tolerance can assist you in determining where you fall on the risk spectrum.
Younger investors with many years before retirement should have riskier portfolios in general. That longer time horizon gives investors more years to weather market ups and downs — and during their working years, investors are ideally just getting started.
rather than withdrawing funds from their investment accounts
Someone nearing retirement, on the other hand, is much more vulnerable to market fluctuations. If you use an investment account to cover your living expenses, you may be forced to withdraw funds from the account during a market downturn, which will not only reduce your portfolio but may also result in significant investment losses.
A higher-risk portfolio would most likely include a large number of stocks and few (if any) bonds. As young investors get older and need to reduce the risk in their portfolios, they should reduce their stock holdings and increase their bond holdings.
The ebb and flow of life will have a greater impact on your investments than you may realize. Being realistic about your current financial situation will help you make sound decisions about where to invest your money.
Are you building wealth that lasts?
Higher-than-average returns almost always necessitate taking higher-than-average risks, and there are no free lunches in investing. Stay focused on three long-term investment musts as you work to build wealth and secure your financial future:
Create a “just in case” emergency fund: Almost a quarter of all Indians have no emergency savings. Don’t let yourself fall into that trap. Retirement savings accounts are important savings vehicles, but using them before retirement usually results in steep tax penalties. To avoid this, create an emergency fund, as previously described, that is equal to three to six months of living expenses.
Making saving automatic — that is, having your bank automatically direct a portion of your paycheck into a savings account — is one of the most important things you can do for your financial future. This ensures that you save consistently rather than forcing you to make an active decision to save money.
This sum should be kept in a low-risk location, such as a bank account, and it should be liquid (i.e., cash or something else that is always available to you) so that you can access it if necessary. After you’ve established an emergency fund, invest your future savings by your risk tolerance.
Direct your savings: In general, you’ll want to begin by determining what percentage of your assets you want to save.
want to be invested in riskier assets (stocks/shares) and what percentage do you want to be invested in safer assets (cash and bonds)? This is determined by your risk tolerance, as discussed above. Someone who is young and working should invest almost entirely in stocks, whereas someone nearing retirement should invest more in bonds.
If you’re just getting started with investing, I believe you should consider mutual funds or ETFs (collections of stocks, bonds, and other investment vehicles) rather than individual stocks (ownership in only one company) because it will be easier to create a diversified account using funds if the account is small.
Diversification (having a diverse portfolio) is important because it reduces the likelihood that your entire portfolio will lose value during a market downturn. You’ll want to look for funds with a proven track record and reasonable fees; popular press and dedicated research sites such as Morningstar or Yahoo Finance will have this information.
When you’re ready to begin investing in individual stocks, you should follow the same procedure.
Conduct research on any companies you are considering: Do they have a proven track record? Is their management effective? Is the stock price appropriate? Is it a good way to diversify your portfolio, or is it similar to what you already have? Take your time with this step to ensure you’re making informed investment decisions. Make variety your investment theme: Diversification across your entire investment “portfolio” (i.e., all of your investments) is critical to wealth creation because it allows you to manage risk more effectively. Stocks are one of the most talked-about investments, but you wouldn’t want to rely on the success of a single company — or even a broader market — for your entire financial future.
Depending on your financial situation and risk tolerance, you may want to consider investing in private equity, venture capital, precious metals, commodities, and real estate. All of these investments can help you diversify your portfolio and manage risk.
Why? Because they rely on different underlying drivers. This means that they generally operate in ways that are uncorrelated with one another and with more traditional investments such as stocks and bonds, so they may rise when stocks fall.
A well-constructed portfolio should include a variety of assets (stocks, bonds, etc.) that do not move in lockstep. This reduces a portfolio’s volatility without necessarily lowering its return potential.
While these steps will not guarantee complete financial independence, I believe they are a good place to start. They can assist you in saving money, diversifying your portfolio, and beginning to build wealth for a better financial future.
The Difference between Liability and Assets?
Your company’s assets are the items it owns that can provide future economic benefit. Liabilities are amounts owed to third parties. In a nutshell, assets put money in your pocket, while liabilities take money out!
