The Lost Art of Saving and Investing
The has been a lot of negative press relating to putting money into savings accounts not being a worthwhile exercise due to the low interest rates on savings accounts. This is a misguided viewpoint, as many people do not understand the fundamental difference between saving and investing and are ignoring an essential financial housekeeping practice.
Years ago people had jars on their shelves at home for their coal money, electric meter, rent and groceries and each week they would pay their wages into the jars in preparation for when they would be needed. The same practice is just as invaluable today although instead of having glass jars full of cash in your house you should open savings accounts to represent each jar.
The term saving according to the dictionary has multiple meanings but from a financial perspective the definition of “something kept from being used: an amount of time or money that is not spent or used” i.e. preparing something in reserve ready for if and when needed.
Regular saving is an essential process of keeping a sum of money aside in preparation for a foreseeable or unforeseeable event in the future. This can encompasses a multitude of domestic items requiring sums of money holidays, new boiler, new furniture, Christmas, birthdays, emergency fund, a new car, deposit for a house, conservatory etc. The point being that you know roughly how much you will need and by how much you can save each month you will know when you can afford to draw the money out to pay for the item.
In terms of the what the interest rates are on savings accounts you should of course find the best available at the time but bear in mind the actual process of saving is more important than being worried about the interest rates available.
To some people this may sound like nonsense however think of it like this: it would be better to be putting small sums away at the start of the year for Christmas irrelevant of how much interest you get rather than relying on November’s pay cheque and going into debt. Again the same principle for putting £50 a month away for emergencies rather than gambling on not needing it and then when something does go wrong you rely on credit and a much higher interest rate of repayment.
Once you have all your “jars” set up to be automatically paid each month (including one which has at least three months salary in reserve) you are ready to invest. However without having your savings foundation you expose yourself to huge risk off losses if you jump straight into investing.
The definition of investment is “spending or setting aside money for future financial gain” and where this is different to saving the emphasis is on future financial gain. Investing money is about gaining the highest return whilst minimising the risk.
The emphasis with investing is fundamentally different to saving. Investing is all about getting your money to make money. Whether its funds, shares, property or commodities all you should be focusing on is what return you think you can make offsetting the risks associated with the investment.
You should always view your investments as a five-year plus commitment in order to see your return. Its like a marriage if you can’t commit and see it through the ups and downs then you’re not ready to invest so don’t kid yourself that you can do it
In addition this area is one where you really need to do your homework in order to give yourself the best chance of making money. So before you commit yourself make sure you know what you are getting into and what you are looking to get out of the investment.
George Soros explains investment very clearly:
“It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.”
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