Saving to invest

A big part of investing is actually having the money to invest in the first place. While you cannot control what the market does, you can control how much you save to invest (and the fees you pay). The standard wisdom from financial advisers and writers is having six months salary in the bank for emergencies and as a buffer for dipping into your investments. As if you can just save six months salary, no problem, while life happens.

Do you really need that much and have it sitting in the bank?

It depends on your situation. If you are young and have no mortgage or dependents, you would be better off putting ¾ of that money in shares/funds/ETFs or another investment that should do better than the bank rate.

At least if you do need the money shares can be liquidated, quite possibly at a lower price. But how likely is it that this big emergency will happen?

You could also use that money to start a business or a side hustle (side job) or enroll in a course/qualification that will increase your earning power.

Another standard piece of financial wisdom is to save on small things like cutting down on coffees and cafe breakfasts, that are always mentioned in articles about saving and while this is correct and it adds up, saving a few dollars here and there will take a long time to accumulate and it takes the focus off the bigger things.

For example, ask for a raise, get a higher paying job. Stop getting parking fines or expensive phones. There is no point missing out on coffees each day if you blow $90 on a parking fine or buy a $1000 iPhone you don’t need.

The human mind will think-I am going so well saving this money cutting down on coffee each day and then get lulled into a false sense of security and then blow it on something larger at the end of the week (or that could just be me, I am not a psychologist).

If you do want to save to invest, I would not worry to much about budgeting as it is like having lots of little goals throughout the day or week and as there are always unexpected expenses and outings that come up, the chance you will go over or break your budget is high and you may get disenchanted and give up.

Budgeting will work for some people. For the majority of people I think it’s best not to worry about every penny- just put some aside for investing and any extra increase in income.

If you get a pay raise or extra money from a side job, you should put say 75% of that into your investment account. Again traditional wisdom is 100%, but I think that while that is prudent, it is easier said than done, especially when you factor in inflation.

If you don’t put away increases in income, you will just end up on the financial treadmill and that’s why you hear of doctors, executives, CEOs etc. being in debt and not having any cash or investments, as they are trying to keep up with friends and co-workers with new cars, holidays etc.

Summary

I think the best thing to do is have a portion of your pay go directly into a separate savings account along with your dividends and reinvest back into shares when opportunities come along.

75% or thereabouts of any increases in income should not be used for daily expenses but invested.

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