Whether you’re just beginning your journey toward financial freedom or you’ve been investing for years, it remains important to simultaneously save and invest, always keeping an eye out for opportunities to save and grow your wealth.
Beginning investors sometimes need a little nudge toward the savings vs investing balance, and if that’s you, you’re in the right place!
At the same time, you might need a push to start saving, a reminder to reduce your living expenses, and revisit your financial goals so you don’t lose purchasing power. There are so many moving parts when it comes to saving and investing money, so let’s be clear – your financial journey is not a set-it-and-forget-it aspect of life!
Even experienced investors with gobs of cash reserves periodically need to be reminded that although they may have the basic money market account, online savings account, checking accounts, and even retirement account established, it’s important to step back and evaluate how much money is going toward each bucket and why. And the biggest question of all – If those activities are moving them closer or further away from the life they want to live.
There is an ongoing, challenging balance between your income amount and the value you need to reach your investing, expense, and savings goals. While typically more difficult toward the beginning of your investing journey, these important saving tips and tricks will help you get a handle on your finances and allow you access to different investment options.
What’s The Difference? Saving vs. Investing
Savers typically deposit the money into an under-risk bank account. Standard online savings accounts are member FDIC insured, and provide a low annual percentage yield. You can even find some online savings accounts that offer no minimums, no monthly fees, no overdraft fees, and other perks to encourage people to establish good financial habits.
No matter where you are, you have enough cash to establish one of these accounts as a baby step toward financial success. You can open an online savings account, typically for free, for any short-term savings goals.
Investing is similar to saving in that you put aside money for the future except that you are in pursuit of a larger yield in exchange for taking more risk. It’s easy to lose money when investing in very volatile assets in very short periods – especially in single stocks.
It’s important that you only invest money you don’t need immediately and won’t miss within the next year or two. Small, very common investments with a low barrier of entry are available through a brokerage account (typically free to open) and are real estate investment trusts, exchange-traded funds, and other money market-type offerings.
Investment opportunities are available outside the stock market and money market accounts too! There are short-term real estate rentals, fix and flips, multifamily properties, commercial real estate syndications, angel investing opportunities and more. Investing is a long-play in which your money earns interest and/or appreciation over 3 or more years.
Why You Need To Save And Invest Simultaneously
Every decision carries risk and while it is great to be planning for your future and building your portfolio, you never know what will happen. Let’s keep our fingers crossed, but chances are you may need to dip into your saving account or emergency fund at some point!
With inflation, the amount you save effectively decreases by about 3% each year. Interest rates can’t keep pace with inflation. As an example, if you earn 1 % interest in a savings account but can earn 8% from your investments, you’d have to funnel an extra 7% into your savings account to keep pace!
Investing gives your money the potential to grow faster than any bank-guaranteed interest rate. When you start investing in high annual percentage yield-earning investments, you’ll have to commit less cash each month than you would if you were relying on standard bank account services to reach your goal.
You need to invest toward long-term, large goals like retirement, vacation home purchases, passive income generation, and legacy creation. Simultaneously, you’ll use money saved, probably through your local financial institution, for short-term goals like your next car, a kitchen remodel, next years’ vacation, and to boost your purchasing power for yearly events like birthdays and Christmas.
Use A Savings Account To Pay Yourself First
Have you ever said to yourself, “where did that paycheck go?!” Yeah. We all have.
For most people, as soon as a paycheck is deposited into their bank account, it’s spent on expenses like rent, groceries, and utilities. So, the vast majority keep saying “I’ll save my next paycheck,” with no real plan in place as to how, because the truth is, no matter when or how much you get paid, there’s always an expense in the waiting.
Hopefully, you’ve also heard that it’s not what you earn, but what you keep that makes you wealthy.
This means no matter your profession or your income, it’s the percentage of your money that you don’t spend (that you save and invest instead) that generates true wealth. So, if you’re at the very beginning of your investing journey, your goal is to reduce your expenses and increase your income so that you can save and invest the difference.
To alleviate the push-pull relationship between earning more versus accumulating higher expenses, you’ve got to implement “pay yourself first” anytime you receive income. Take a small percentage of your paycheck (maybe just 5% to start) and place it directly into your emergency savings account before any other bills or expenses get paid.
Moving a nominal value to a different bank account creates a beneficial barrier, protecting you from spending those savings. Rest assured that once you’ve paid yourself first, you can spend what’s in your checking account without feeling guilty.
If you are in a position where your job offers direct deposit, you can easily split your deposit by amount or percentage. This allows you to allocate, for example, 5% to your emergency fund and 95% to your checking account. This way, you don’t risk forgetting to transfer it or spending it accidentally, and you’re automatically saving more money over time.
Get Your Side Hustle Funding Your Investment Accounts
Whether you are trying to boost your credit score, reach an income goal, or afford a big purchase, a part-time job or a side hustle can really help accelerate your progress. With so many opportunities, both in-person and virtually, that encourage connection, collaboration, and providing services as solutions, this is one of the easiest ways to get going in the right direction.
Have you heard of the gig economy? If you’re looking for a way to save and invest quickly, join the vibrant online community of independent businesspeople making money!
The secret is to put whatever money you make from your side hustle into a savings account. Choose whether you want that extra cash to be deposited in your retirement savings, high-yield savings, emergency fund savings, or another investment account/financial possibility.
If you don’t feel like this is the right fit for you. There are several ways to make money by selling items that you no longer require. Mercari, Poshmark, and Facebook Marketplace are all excellent choices!
Examine your belongings to see what you should get rid of. Clothes, handbags, and accessories are common on resale marketplaces. Bigger items like as decorations, children’s toys, or furnishings may be sold locally.
Create A Plan For The Unexpected: Emergency Savings Accounts
Life is, by its very nature, a hazardous and unpredictable experience. The adage “prepare for the unexpected” will have you setting aside a percentage of your income to build up a little safety net, whether you know how much money you’ll need ahead of time or not.
When you find yourself in a financial jam, it’s tempting to stop investing, assuming you’ll be able to access cash that has yet to be invested. However, if you’ve already created an emergency fund, you won’t have to pause your investment goals or risk hindering your wealth-building progress.
An emergency fund exists to help you afford home repairs, emergencies, and other unexpected costs in a time of financial crisis. Then, when the repairs are done, the insurance pays out, or you’re on your way in your new job, you can rebuild the emergency fund, all while your investment strategy remained uninterrupted.
You might increase or decrease your emergency fund amount as you go. You can also change the money saved based on your costs and obligations, your employment situation, or concerns regarding either, and evaluate your savings account objectives once or twice a year. Financial experts recommend that you aim to save three to six months of expenditures in an emergency fund.
Maintaining a hefty emergency fund is a great way to keep your retirement funds, investment accounts, and other savings accounts intact. Remember, whether we’re talking about building your emergency fund, stuffing other savings accounts, or funneling cash toward investments automatic recurring transfers are your friend!
Factor In Your One-Time Goals
In addition to your long-term goals like retirement, and your short-term goals like next year’s vacation, you’ll want to set aside money for one-time events like a new home or car, college tuition for your child, etc. Each one-time savings goal has an objective, and once achieved, you no longer need to contribute money in that direction.
For one-time goals and anything that you’d like to achieve within 3-4 years, you’re much better off saving than investing. Investing is an option to consider but one bad year on the market could mean you may not achieve your target. You will have to decide whether to save or invest depending on your flexibility, your risk profile, and the timeframe of your goal.
Pay Off Your Loans With Aggression
I’m guessing you probably glare angrily at your phone or computer whenever you see the whole balance on your loans and credit cards. You are not alone in this behavior.
But you aren’t defined by those figures. If you have credit card debt, a student loan, or any combination of other high-interest debts, it will be tough to establish an emergency fund or invest for the future.
They consume the majority of your salary, thus they limit how much money you have set aside for savings and investing. It’s possible that you need to start paying more attention to certain debts in order to make progress on your savings account and investment goals.
There is a tremendous benefit to working with financial advisors who can review your credit report, compare it to your personal financial budget, and help create a debt payoff plan. They’ll know how to consider interest rates, minimum payment requirements, and work with you to prioritize which debts should be paid off first.
Simply put, even if your income doesn’t increase, by deleting your high-interest debt, you will free up more money for your investing and savings account goals.
Learn About The Cost of Your Investments
Every CD, broker service, transaction, and mutual fund has a cost. So, as you walk your financial journey toward building wealth by saving and investing simultaneously, you’ll want to pay special attention to the fees required by each opportunity.
Some stock market transactions and money market accounts have a per-trade fee. If so, make sure the value of what you’re trading and the reason you want to trade it is compelling enough to cover the fees you’ll be charged. Some accounts offer free trades in exchange for a monthly fee. No matter who your brokerage is or what you’re invested in, be sure to read the fine print issued b the financial institution or securities broker.
Examine the mutual funds in your retirement or brokerage accounts, for example, and see how much they cost compared to expected gains. Is there a percentage of the financial markets’ growth based on your balance that goes to your financial advisor or broker? The more you know about fee and transaction information, the better, more profitable financial decisions you can make for yourself.
Employers often provide a retirement plan as part of your compensation package. However, keep an eye on the costs and minimum balance requirements since they can be costly. If you discover steep fees inside your employer-offered plan, but still want the match (because hey, I wouldn’t pass up “free money” either), just contribute up to the match and funnel the rest of your retirement savings to a separate brokerage account.
As long as you’re following an overall financial plan toward building and generating wealth, whether you invest inside an employer offered plan or on your own is irrelevant. In time, you’ll be working toward a highly diversified portfolio, putting money into various investments across the stock market and real estate, for example. Do your due diligence, examine fees, tweak your budget, and start investing in alignment with your financial goals.
So What’s Your Perfect Savings vs Investment Ratio?
No matter where you are along the path toward financial freedom, the key takeaways here are to set financial goals and then create “guardrails” for yourself with established savings and spending percentages plus automatic deposits. Furthermore, a recurring, periodic check-in should be scheduled on your calendar where you set aside time to rebalance, evaluate your risk tolerance, make adjustments to your budget, explore new financial products, or further diversify your investments.
We talk all about real estate syndications here at Goodegg, because that’s how we’ve accelerated our passive income and wealth management strategy for our family’s plus thousands of others. We’re experienced in working with investors at all experience levels, and truly believe that when you watch out for and respect your money, it takes care of you back.
There is no perfect ratio to saving vs investing because it’s all dependent upon your income, your life situation, and your unique investing goals. Establishing a plan to save and invest at the same time is one of the best ways to get that reciprocal train rolling!
As you check in with your expenses, emergency fund savings levels, and investment returns, we invite you to join the Goodegg Investor Club because we love talking about this stuff! Julie and I would love to help you outline your investing goals and help you determine if real estate syndications align with them. We’re constantly sharing money tips, real estate investment advice, and how you can create passive income to generate the life you’ve always dreamed of!