Saving for a rainy day.
We’ve all heard this phrase before, but what is saving?
In short, saving is deliberately putting aside a part of your money rather than spending it.
Why would you want to not spend your money? Isn’t that what money is for?
People save for several reasons. They usually boil down to wanting to have more money in the long-run, particularly so they can afford something that they can’t normally pay for.
For example, if someone doesn’t have enough for a holiday from one week’s wages, they could save up some of those wages for several months until they have enough to afford the holiday.
Whilst you could borrow the money to pay for what you want sooner that carries the risk of ending up in debt. Saving, on the other hand, mitigates that risk since although you must wait longer, you’re only spending money that you have beforehand. Whether saving or borrowing is better for you depends on your circumstances.
Having some money saved for emergencies or financial difficulties can give you peace of mind since you know you’re covered to an extent if times get tough, like if you lose your job or your house needs urgent repairs.
Growing your Wealth
In addition to setting aside money for when times are tough, you can invest savings with the goal of gradually growing your income over time.
The main principle of saving, setting aside money and not spending it, applies to investment but there are more steps on top.
Investing requires you to put your money into an investment vehicle such as a savings account, bond or share as opposed to keeping your cash under the mattress.
Investing is a way of increasing the value of your savings. There is the risk that your investment could decrease in value. Investing is important to be mindful of if you’re saving for a long time. This is because of inflation. Inflation means that over time the value of your money decreases, even though it still has the same face value. For example, £10 today can buy less than £10 twenty years ago. So, if you don’t want your savings to decrease in value over time, investing them can be a way of at least maintaining their real value.
Some investments tend to be riskier than others. A broad rule of thumb is that the greater the risk, the greater the reward if it pays off.
For example, buying a government bond can be stable and lower risk because governments tend to be publicly accountable for their finances, although this usually comes with a meagre return on your investment. Low risk is not the same as no risk. Some countries have turned out to be riskier than others; they can nevertheless come with higher yields. For example, Greek government bond yields increased steeply in 2012 whilst there was instability in the EU’s economy.
To contrast, shares and commodities can be more volatile depending on which sort of business the share represents or the type of commodity you purchase. The circumstances vary wildly so researching thoroughly before you invest is a good idea.
Ease of Access
Another key thing to consider is how easily you’d like to access your savings. The general trade-off here is that the longer savings accounts and other investments that require you to lock-up your money for, the greater return you get on your investment. Conversely, investments that offer more flexibility for you to withdraw your money as you wish would typically have lower returns.
It’s a good idea to think about how urgently you might need the money you invest.
Do you think that if, goodness forbid, you ran into severe financial difficulties by losing a job or your home, that you’d need to have easy access to your investments? Or would you have enough money on-hand outside your investments to cover your expenses and therefore be able to afford to keep your investment locked up? If the former, a more flexible but lower yield investment could be more apt for you; if the latter you may be better positioned to take advantage of a less flexible but higher yield option.
Priority-wise, ensuring that you have enough on-hand for a rainy day, as well as consistently paying down any debts you have, is probably more important than investing in all manner of exotic financial products; thus, you should seek qualified financial advice before making big decisions about what you do with your assets.
Original article by Overdraft.com. All rights reserved.
Please note that this is for informational purposes only and doesn’t constitute financial advice.
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