Saving & Investing
The key to building wealth is saving and investing your money. However, few people understand how to do it or how to do it successfully. In fact, most people are actually doing the opposite of what they need to do! In order to build wealth, one needs to master the art of saving and investing. Below you'll find some simple tips that can help you understand the basics of saving and investing as well as how to do it successfully.
What is Saving?
Saving is the act of setting aside money for future use, usually for an important purchase like a house or vehicle, as a ‘nest egg’ for your retirement, or as a safeguard against emergencies. In order to save money, you need to earn more money than you spend. If you earn $1000 and spend $1000, you have neither saved nor invested any money.
How much money should you save?
The amount you should save is based on your financial goals and your time horizon. In order to build wealth, you need to have a long time horizon or a high savings rate. If you have a short time horizon or a low savings rate, you won't be able to save enough money to meet your financial goals, unless they are very modest.
If you don't know how much to save, start by putting aside 10% of your income. You can always adjust your savings rate going forward.
What is Investing?
Investing is the act of deploying your money in order to earn returns, i.e, get back more than what you put in. Investing is the opposite of saving, and it can be risky. Typically, when you put your money in a high-risk investment, you could receive a high return on investment (ROI) – or none at all if it goes bad. When you invest in a low-risk opportunity you are more likely to earn a return, but it won’t be as high. In order to reduce or 'mitigate' risk, you should invest in diversified assets that have low correlation to each other. In other words, don’t put all your eggs in one basket!
Allocate your money to different asset classes. The proportion of the various asset classes should be based on their risk and return characteristics. Start by investing according to your tolerance for risk. Begin by investing in low-risk assets and then gradually invest in higher risk assets.
How much should you invest?
The amount you should invest is based on your financial goals and your time horizon. The more you invest, the higher your returns could be. However, there are no guarantees. If you invest more than you can afford to lose, you run the risk of a serious financial setback, and a lot of lost ground on your path to wealth.
To start investing, consider putting aside another 10% of your income. This will likely have an impact on your lifestyle now, but picture your new and improved lifestyle when the investments pay off in the future.
Remember: don't invest more than you can afford to lose.
How to Invest
The key to successful investing is to understand the key asset classes (equities, bonds, cash, etc), their risks and return characteristics and how they interact with each other. Not all asset classes are created equal. Some asset classes are more effective at delivering returns than others. Some asset classes provide more risk than others. Your goal is to invest in asset classes that will deliver returns and to do it in a way that mitigates risk.
In order to understand the different asset classes, see our article on investing strategies.
How to Build Wealth
The secret to building wealth is to live within your means, put aside some savings for big purchases in the short term, and make intelligent investments for a high return in the long term. The more you save & invest, the more money you'll ultimately be able to make.