While scrimping as a student is almost a rite of passage, being cash poor once you are working should not be considered par for the course.
If you have a decent job but find yourself searching in your coat pockets for forgotten change at month-end – you are doing something wrong. You need to get into a position where you have money left over each month. A portion of that money should be for you to enjoy and the rest should go into some form of savings account. It sounds simple enough but saving is far more than putting money aside for a rainy day. The art of saving is a multifaceted pursuit and done properly it can make you wealthy.
The first step to getting your savings plan right is to understand that there is a significant difference between saving and investing but they have equal importance in terms of crafting a financial plan. Turning ourselves from savers into investors is vital to our long-term success but it is a transition that many of us have trouble making.
The act of saving is a secure way of accumulating money. Investing on the other hand carries with it the concept of risk. As a general rule, saving is the process of placing money in interest-bearing accounts with fixed or predictable returns. Investing is saving money in vehicles like retirement annuities, the stock market and unit trusts. These products do not earn interest but rather grow in value as a result of the underlying asset. Therefore the risk is higher because you are banking on the fact that the underlying assets of the investment keep growing in value.
Fear of investing in the tock market or stock-based investments makes people seek out very predictable and conservative places to save. They look for guarantees that won’t lose money and they actively avoid placing money in areas where its value could fluctuate.
While caution when you are investing or saving is a good thing, being overly cautious could mean that your money does not grow enough to cover the effects of inflation. The solution for the fearful investor is to adopt a long-term view to savings and investing, and to use both of these vehicles to build your wealth. You can have the best of both worlds if you separate your long-term and short- term financial goals. Short-term goals such as new furniture or a vacation can be saved for in traditional savings areas such as fixed deposits or the money market. The long-term goals, such as having sufficient money for a comfortable retirement, should be provided for separately, in more performance-oriented, stock market-linked investments.
For most people, this means using professionally managed investments like unit trusts to achieve their long-term goals. This means that that you don’t have to become an expert; highly skilled investment managers do the work for you. In order to successfully invest you must ensure that the goals of the managed investment tie in with your personal goals and that you are comfortable with the risk profile and the premium the advisor has recommended. You must also learn to accept fluctuations in the value of your long-term investments. It has been proven that in the long term, the trend of most share-based investments is upwards and they consistently return inflation-beating performances.
If you are finding that you cannot save for short- or long-term goals, have a good look at your spending habits and debt exposure. One of the biggest reasons people don’t save enough or have a safety net in their budgets, is that they have way too much debt in proportion to their income. Another factor that stops saving in its tracks, is ineffective money management. If you repeatedly spend every cent you have each month with no plan in place, you will never gain traction. Take the time to plan your financial life – if you draw up a budget, start a debt elimination plan, ditch the expensive designer drinks, and start a savings plan you will feel way more in control of your life. Being financially on track gives you freedom of choice. Instead of weighing up whether you can afford a holiday, you will be choosing between the beach or the bush. This is a much more pleasant dilemma to have.