Saving and investing go together like milk and cookies, sweet and sour, and Elvis and banana peanut butter sandwiches, right? Right. Well, almost right. It’s easy for us to say that saving and investing are important parts of a personal finance plan. It’s easy for us to say that and then move on. After all, we just said they’re important, right? Not so fast.
Saving and Investing ARE important
They just aren’t equally important. Heck, it’s another whole post, but even the different types of investing aren’t equal. Just as important as saving and investing together is the concept of when to use which, and how much. The mix of liquid savings in the form of cash accounts and CDs with the amount of your money that’s invested can be one of the most important parts of your overall personal finance plan.
Traditional advice tells us that cash accounts and CDs are the super safe way to keep your money with you, and investing, in it’s varying forms is all kinds of risky. Investing in stocks? Risky. Investing in pork bellies? Risky. (unless you really like bacon. Just kidding, still risky.) But, is the amount of risk involved in investing more or less risky than leaving too much of your money in the bank to rot away at current interest rates? How about you ask the people of Cyprus if they still feel safe having their money in the bank?
Success is risky.
Few who accomplish success do so without some element of risk. In fact, the easier the path to success is perceived, the less chance there is of truly obtaining it. I don’t say that to seem philosophical. I want to make a point, however. You’ve got to have a little risk, if you want to succeed. You’ve got to have Investments if you want to succeed financially. And, I think the ratio of investments to savings should probably be much higher than most would suggest.
Investing for Financial Independence
One of the key tenets in a financial independence plan is that you need to replace your income in order to free yourself up to be independent of a job. Not independent of work, but of a job. There are, obviously, many ways that you can go about replacing that income. Decreasing your expenses is usually a part of most plans. But, most people’s expenses will only decrease so far. Sure, you can go extreme, and get them lower, but for many that isn’t what financial independence is about. Even with your expenses decreased as low as you’re willing to take them, you’ve still got to replace the income to pay those expenses. Investing can be a very good way to get started towards replacing your income.
Investing for Income
In order to replace income with investing, you’ve got to invest for income. You probably try and do that by becoming a super successful day trader and making up the income in profits from all the great deals you made. First, find yourself a few super successful day traders who have done that. Come back when you’ve given up. If you’re going to invest for income, it’s got to be reliable. It can’t rely on your ability to find a good bargain and then sell it at a massive profit a few days later. There are traders who are still waiting on Facebook to make a comeback so they can even get their money back. Reliable income is the key. For this, we need investments that are steady, don’t require the continued increase in value of the stock, and also don’t require us to sell like a fiend in order to create the income. What are these mysterious investments, you ask? Dividend stocks.
Dividend stocks are stocks that pay a dividend on each share of the stock that is held. The amount of the dividend can vary, but there are many that you will find that pay dividends in the range of 2-4%. Depending on the policy of the company, they usually pay quarterly, but there are some that pay monthly and yearly.
Dividend stocks aren’t the only way to invest for income, however. Investing in peer-to-peer lending in a program like Lending Club is one. Rental real estate is another. A business can even be a way to invest for income. Each has varying levels of passivity, or the amount of direct interaction on your part to earn the income. A business that you run can mean well over 40 hours a week of direct interaction to create the income. Something like Lending Club or rental real estate can be brought down to a level that borders on passive income entirely.
Savings vs. Investing
With any investing tool, whether it be dividend stocks, lending, real estate, or some other instrument, there will be risk. With risk usually comes reward. I’ve been earning over 8% return on my Lending Club portfolio. Dividend stocks can lose value, or even stop paying dividends. The real estate market can dry up, and you can have problems finding renters. Risk is inherent. Unless you want to directly trade your time for money (call it a job), you’ve got to take on a little risk and begin setting yourself free.
Savings shouldn’t be shunned completely. I still believe that an emergency fund is an important tool. I still covet a debt free lifestyle. But, once my debt is paid off, and my emergency fund is full, you can bet the rest will go towards investing for income, and building my wealth towards financial independence.
How about you? What is the role of savings in your personal finance journey?
I started this blog to share what I know and what I was learning about personal finance. Along the way I’ve met and found many blogging friends. Please feel free to connect with me on the Beating Broke accounts: Twitter and Facebook.
For the 15 years my husband and I have been married, we’ve always shared just one car. Actually, most of the time I’ve been the one with the car—first because I had to drive to work while he could easily take the train, and, once I became a stay-at-home mom, because I usually had the kids that I needed to transport while he could commute by public transportation.
While he’s been a good sport about this situation, the time has come to finally buy another car that he can use.
The problem? We don’t want to take out a car loan because doing so would create a serious strain on our budget. We want to pay cash instead.
But how do you save money for a car when you feel like there’s absolutely NO wiggle room in your budget? Here are the strategies we’re using.
Save Cash Back from Credit Cards
Our credit card regularly gives us cash back. For the first three months of 2016, we’ve earned just shy of $150 in cash back. If we continue at this pace, we’ll have an extra $600 in cash back thanks to using, and paying off, our credit card each month for as many purchases as we can.
Save Whenever You Receive Discounts on Regular Expenses
This is my favorite way to save because there are so many opportunities to save this way!
For instance, at Christmas, we received a postcard from our car repair shop offering 10% off our next car repair. I held onto that, and just last week we had a $284 car repair. We saved $28 thanks to the postcard, and that money went right in our car fund.
We took a vacation recently and stopped by Denny’s on our last day when we had eaten up all the food we had brought with us in the cooler. Our total was $39, but for some reason, the cashier decided to give us a $6 discount. I put that money right in our car fund.
Our grocery store gives fuel rewards points for shopping. For every $100 spent in groceries, you get 10 cents off your next gallon of gas. If you buy a gift card, your reward points are for double that amount. I send any of those savings to our car fund. Just today I put 19 gallons in my tank, and I got 20 cents off per gallon. I put that $3.80 into our car fund.
Save Change or a Specific Bill
I don’t use this strategy anymore because we typically use credit cards for our purchases, but when I was using cash a lot, I never spent the change and earmarked it all for a specific fund. One time, I went several months saving all of the $5 bills I got and used them to pay down debt.
To be sure, none of these savings strategies is growing our car fund at an impressive rate. However, we ARE saving something using ways we save in our everyday lives. We’re consciously, physically setting aside our savings, which is a great way to save when your budget is tight and you feel like you have no wiggle room.
Do you save like this? If so, what are your favorite strategies?
Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in New York, where she loves the natural beauty of the area.
One of the tenets of a frugal life is learning impulse control.
Are you running errands and want to drink a soda? Just wait until you get home. Instead of paying $1.00 for a can, you can have one that you bought in bulk for .10 a can.
Are you excited to see the latest movie by your favorite actor? Don’t pay $10 or more per ticket; just wait until it comes to DVD and check it out from the library. Or watch it on Netflix or Amazon.
Often, when it comes to frugal living, simply waiting can save you money—a lot of money.
Your Frugal Life can Cost You Money
However, the same impulse that prompts frugal people to wait can also end up costing them a lot of money, if they’re not careful. The key is knowing when it’s good to wait vs. when you need to take action.
Car Repairs
When it comes to mechanical car repairs, waiting will almost always cost you money. For instance, a few years ago, I heard a squeak when I pushed on the brakes. However, we didn’t have the money for a costly repair, so we put off the repair while we tried to generate more money. While we waited, the brakes continued to deteriorate, so a repair that would have only cost a few hundred dollars had we taken care of it quickly, turned into a repair that cost several hundred more. Ouch. Lesson learned.
However, for non-mechanical repairs, waiting or just not fixing them can save you money. Our electronic sliding door on our minivan has been broken for a few years now. (The cable is frayed.) Repairing it would have cost $1,000+. Since the van has nearly 200,000 miles on it and is 13 years old, we opted not to make that repair.
Home Repairs
Some home repairs can be put off, but most of them, like car repairs, need to be attended to promptly. If they are, they will cost much less money. Case in point? We disliked our kitchen faucet. It was very low, and it was hard to use when washing pots and pans. We wanted to replace it but didn’t have the money. Well, this summer, we learned that the faucet had been leaking. There were actually three leaks dripping under the sink because the previous owner had duct-taped (!) one of the pipes under the sink. The plumber replaced the faucet and changed the pipes under the sink. We would have had that expense regardless of when we replaced the faucet, but had we taken care of the faucet earlier, we would have saved ourselves the cost of water damage repair underneath the sink.
Similarly, proper gutter supplies prevent costly home repairs by effectively diverting rainwater away from the foundation and walls, mitigating potential water damage and structural issues. Neglecting gutter maintenance can lead to expensive repairs stemming from water-related damages. Just as addressing a leaky faucet early can prevent extensive damage, timely gutter maintenance can safeguard your home’s foundation and structure, mitigating any potential costly repairs in the long run.
Living a frugal life and waiting for most things in life can save you thousands, perhaps hundreds of thousands, of dollars over your lifetime, in some cases, waiting will just cost you more.
Do you tend to put off home and car repairs because of your frugal life, or do you attend to them promptly, knowing they will likely cost more money if you don’t?
Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in New York, where she loves the natural beauty of the area.
