Everything in life has its moment, including your personal finances. There is a time when saving should be your priority and another time when you should focus on investing. Your age and how far you’ve come are the keys to knowing when to take the leap from saving to investing. Not sure when? Keep reading below!
Before You Invest, Build an Economic Mattress
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 “only invest what you can afford to lose”. In any case, its practical translation is very simple: before investing, build up your cushion for the unexpected (or at least a part of it).
This economic cushion is the money that will allow you to meet unexpected expenses without having to resort to loans or withdrawing investments once you start. It’s your safety net if everything goes wrong; capital that should always be available and secure, without assuming any risk.
What Is a Good Savings Amount for a Mattress?
The most repeated recommendation is to 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 with three months and those who prefer to have a year’s worth of capital saved. In any case, once you have that three-month cushion, you can change your savings strategy to start making room for investment.
Saving and Investing: Are They Compatible at the Same Time?
Saving and investing are not mutually exclusive; you can invest while saving and vice versa. It all depends on your starting point and your savings capacity. In other words, how much money you have saved and how much you can save each month.
If you’ve already saved three months of your fixed expenses, you can start putting aside an amount of your monthly savings for investment, while continuing to allocate the rest to building your financial cushion, at least until it reaches the level you’re looking for.
For example, if you are able to save 250 dollars per month and already have an economic cushion for three months, you can save 150 dollars and invest the rest until you have the amount you have decided to use as a contingency fund.
How Much of Your Money Should You Invest?
The reality is that there is no concrete measure. The answer depends primarily on your priorities and what gives you peace of mind. Is it more important to have a good emergency mattress or to get the most for your money? Answer this question and you’ll know what to do.
How Do You Start Investing Once You Have Savings?
There is more than one way to start investing. A very common misconception is that you need to have a lot of money to start investing. Nothing could be further from the truth. Of course, you can wait until you have 10,000 dollars to invest as you used to, but it is no longer necessary.
There are products today that allow you to invest small amounts of money each month. They are ideal for small savers who haven’t raised a large amount of capital, but have a monthly savings capacity and know that the sooner they start, the better.
What Happens if You Have to Use the Emergency Fund?
The emergency fund is there for you to use, but once you do, it is essential that you replace the money you have withdrawn. You can do this by increasing the money you allocate to savings and reducing investments; or by taking back some of the money you invested if it is the right time to do so, although this is always less recommended. Again, the decision will depend on how important the emergency fund is to you and, more importantly, how much money you have left.
In summary, it is best not to save and invest when you do not yet have an emergency mattress. On the contrary, it is better to stop saving and invest only when that emergency mattress is already the size you want. This is the signal to stop saving and start investing. What are your thoughts? Let us know in the comments below.