Everything in life has its moment, so do your personal finances. There is a time when saving should be your priority and another when you should focus on investing. Your age and the path you have traveled so far are the key to know when to take the leap and stop saving to start investing.
Before investing, prepare an economic cushion
There are few golden rules in finance, but this is one of them. It can be expressed in different ways, from the classic “don’t invest the money you need” to “invest only what you can afford to lose”. In any case, its practical translation is very simple: before investing, build your mattress for unforeseen events (or, at least, a part of it).
That economic cushion is money that will help you cover unexpected expenses without having to resort to loans or withdraw investments once you start doing so. It’s your safety net if everything is twisted; capital that should always be available and safe, without taking any risks.
How much is a good mattress saved?
The most repeated recommendation is that you build a mattress with at least three to six months of your fixed expenses. From there, the amount will depend on the level of security you need and your life goals.
There are those who have enough three months and those who prefer to have one year of capital saved. Anyway, once you have those three months of mattress you could change your savings strategy to start giving way to investment.
Savings and investment: are they compatible at the same time?
Saving and investment are not exclusive, you can invest while saving and vice versa. It all depends on your starting point and your ability to save. In other words, how much money you’ve saved and how much you can save each month.
If you already have three months of your fixed expenses saved, you can start setting aside an amount of your monthly savings to invest while still spending the rest to grow your financial cushion, at least until it reaches the level you’re looking for.
For example,if you are able to save $ 250 per month and you already have a three-month budget mattress, you can save $ 150 and invest the rest until you put together the amount you have decided you want as a contingency fund.
How much of your money should you invest? The reality is that there is no concrete measure. The answer depends above all on your priorities and what allows you to be calmer. Is it more important to have a good emergency mattress or get the most out of your money? Answer that question and you’ll know what to do.
Roadmap to your first $100,000
Nothing as an example for you to understand how to articulate your own plan. The goal in this case is to collect your first $100,000.
These are the steps you should follow and how long it will take you to get it starting from a saving of $250 per month and thinking that you need to collect $8,000 as an emergency mattress (six months of fixed expenses).
Step 1: 100% Savings
You will start by saving 100% of your saving capacity for 16 months until you have 50% of your mattress for contingencies, which is equivalent to 3 months of fixed expenses or 4000 $.
- Time of the first stage: 16 months.
- Accumulated savings: $4000.
Step 2: 50% savings and investment
You will continue to allocate 50% of your saving capacity to save and the remaining half to invest until you reach your goal of having your financial cushion.
Only 50% for savings will be added to the financial cushion. The rest of the capital will be invested in the long term to reach that goal of having your first $100,000. For the calculations we will assume that you are able to obtain a return of 4% per year each year.
- Time of the second stage: 32 months.
- Total time: 48 months (4 years).
- Accumulated savings: $14.624,48 ($8000 emergency fund + $6624,48 in investment).
Step 3: 100% investment
With the financial cushion complete, you will invest 100% of your savings capacity in the long term under the same conditions. At the end of 20 years you will have added your first $100,000.
- Time of the second stage: 240 months (20 years).
- Total time: 288 months (24 years).
- Accumulated savings: $111.291,02 ($8000 emergency fund + $103.291,02 in investment).
To speed up the pace you can increase your saving capacity or try to achieve a higher return.
How do I start investing once I have savings?
There is more than one way to start investing. A very common mistake is to think that to invest you need a lot of starting money. Nothing could be further from the truth. Of course, you can expect to raise $10,000 to invest as it was done before, but it’s no longer necessary.
Today there are products that allow you to invest small amounts of money each month. They are ideal for small savers who have not raised a large capital, but who do have the capacity to save monthly and are clear that the sooner they start, the better.
We’ve an example of this type of investment. In addition, they allow you to do it automatically and easily every month, without you having to worry about anything. Of course, you can also expect to save that $10,000 and also face the dilemma of whether it is better to invest it at once or with periodic contributions.
What if you have to use the emergency mattress?
The contingency fund is there to use, but once you do it is imperative that you replenish the money you have withdrawn. You can do this by increasing the money you spend on saving and reducing the investment; or recovering part of the money you have invested if it is a good time to do so, although this is always less advisable. Again, the decision will depend on how important the emergency fund is to you and, above all, how much money is left.
In short, it’s best to only save and not invest when you don’t already have an emergency mattress. On the contrary, it is better to stop saving and only invest when that mattress for unforeseen events is already the size you want. That’s the sign that you should stop saving and start investing.