Save now and invest later
Posted: November 24th, 2008 | Author: Mo2 | Filed under: Investing, Retirement | Tags: 401k, Finance, financial plan, Investing, Parking money, RRSP, saving money |Keep the two concepts separate!
When you’re working full time there really is no time to do anything but work, go home, eat and sleep. At least that’s how it seems sometimes. I always tell people that no matter how busy you are, you have time, it’s simply about how you look at things. When you look at a glass with water filled halfway, do you see a glass that is half empty or half full?
Saving vs. Investing
Saving money is basically putting away money for future use, whatever that may be. Of course, there is saving money by spending less on items that you buy and this should directly reflect on what you put away. It takes effort to put money away since we all have so many expenses in our daily lives. We always have more “wants” than “needs” in life. We all have our dreams and always think about the items that we really want to buy but for obvious reasons we hold ourselves back because if you’re like me, you don’t want to doom yourself in financial failure.
Putting money away should be a must in your life. If you are getting a paycheque, you should automatically put away money into a savings account and never touch that account unless you are investing it.
Investing your money is looking for a return with a certain degree of risk. Government issued investments such as treasury bills and government bonds have virtually no risk but have minimal return. You can increase your risk by buying debt securities or even stocks, which have the potential for greater return. Overall you should have a good mixture of it all so that you can reap the benefits when a certain market is performing well.
Keeping the two ideas separate
A lot of people think about saving and investing as the same thing. In Canada we just had our Registered Retirement Savings Plan (RRSP) deadline pass on February 29th . The RRSP is to us what the IRA is to the citizens in the US. When I talked to people about contributing to their RRSP a response I often received was, “The markets are plummeting, why would I want to invest now?”
Responses like this make me cringe since it tells me that the person hasn’t put much thought into putting money away. Just because you put money away, whether if it is a savings account or an RRSP (just to park it), doesn’t mean you have to invest it in the stock market right away if at all.
Once you have enough funds put away then you can start thinking about investing it. Investing isn’t easy either but there’s no need to push yourself into putting everything into a penny stock that your uncle Jim has told you about. Put your money away and start learning about investment vehicles little by little. It’s a long process but the more financial knowledge you have the more success your will have.
Investing is an Art
Every person has a different portfolio because we all have different personalities. How we are as a person reflects in our portfolio because it reflects our risk profile. If you are someone that is more conservative then you will have more cash and fixed income securities than equities (stocks).
I’m someone that can take on more risk because I’ve been studying investing and trading for years and I’m more comfortable with taking risks. But in the beginning I thought savings accounts were the only way to go. That’s because I didn’t know what investments were available. I still don’t fully understand a lot of the investments out there since in the day and age we live in there are investments that are always being added.
Do what is comfortable
Some people might disagree with me on this but I feel that you should stick to what you are comfortable with. If you push yourself into something you don’t know it will only come back to haunt you. Even if you are to get a 100% return in the next year on a certain stock, if you have no idea how that return was produced you’ll end up giving it back in the near future.
Having said that, because you are uncomfortable with something now it shouldn’t stop you from pushing yourself to learning more about other investments. The more you learn and the more your experience the more comfortable you will be in taking on risks. It’s never too late to start and it’s a lifelong process.
Mo2 Thinks…
You should always be saving your money and putting it away into something that is extremely liquid such as a savings account or treasury bills so that you can invest it when the time comes. Start investing small and diversify your portfolio it doesn’t matter what others say; when you start out you have to diversify. Obviously with a $5,000 portfolio there is only so much you can do and that makes sense and this is the only time mutual funds make sense.
As your portfolio grows that means you have more experience and more capital. When you reach this stage you should diversifying without using mutual funds make sure you look to see that have different types of stocks looking at different sectors with negative correlation preferably.
In addition, make sure you have liquid cash-like assets along with fixed-income, and equity exposure. This is what we call asset allocation and finding the perfect fit for you will depend on your risk profile. As a general rule, the less risk tolerant you are you should stick to cash and fixed income assets and the opposite for those that are more risk tolerant.
Remember that saving and investing are two different things. Just because you aren’t ready to put money in the stock market just yet, should not refrain you from putting money away into your savings account or RRSP. The stock market isn’t the only market that exists, as a matter of fact despite the media exposure it receives; the currency market easily dwarfs the stock market.
Good luck with your saving and investing!
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