When it comes to financial planning, investment returns often take center stage. It’s pretty common for us to see someone buy one stock and hope it hits a home run. However, while the allure of high returns can be enticing, the foundation of a solid financial plan often starts with one simple but crucial factor: saving enough.
It’s not uncommon for individuals to become preoccupied with chasing the perfect investment vehicle – after all, we can point to dozens of stories about overnight millionaires who struck gold in the stock market or the latest crypto craze. But here’s the reality check: investing is just one piece of the puzzle, not the magic wand that guarantees financial security.
Why Saving Is More Crucial Than You Think
Lack of Savings Hinders Investment Opportunities: It’s nearly impossible to invest without a pool of capital to work with. Without sufficient savings, you’ll have limited resources to put into investments. Even if you make impressive returns on a small investment, the overall gains won’t be substantial. A solid foundation of savings allows you to take advantage of investment opportunities as they come.
Emergency Fund and Peace of Mind: Your financial plan should always include an emergency fund. Life is full of surprises, and having cash reserves for unexpected expenses is essential. Relying solely on investments can lead to panic selling during market downturns, which can result in significant losses. A robust savings cushion provides peace of mind, knowing you can handle unforeseen financial challenges without jeopardizing your long-term investments.
Diversification Requires Savings: Diversifying your investment portfolio is a crucial strategy for risk management. However, diversification often necessitates investing in different asset classes, which requires substantial savings. Without an adequate savings base, you might be overexposed to a single type of investment, which can be risky.
Saving for Specific Goals: Investing without a clear goal is like driving your car without knowing where you’re going. Whether it’s buying a home, sending your child to college, or retiring comfortably, achieving these objectives requires a disciplined savings plan. Investments are a means to grow your savings, but the savings fuel the goals.
Peace of Mind During Market Volatility: Investment markets can be volatile, and returns can fluctuate widely. Saving enough ensures you won’t need to liquidate investments during a market downturn to cover everyday expenses or financial emergencies. This patience can lead to better long-term returns.
The Right Balance Between Saving and Investing
So, how do you strike the right balance between saving and investing? Here are some practical steps to consider:
Set Clear Savings Goals: Define your financial objectives, whether it’s building an emergency fund, buying a home, or retiring comfortably. Knowing what you’re saving for will help determine how much to save.
Automate Your Savings: Set up automatic transfers to your savings accounts. This way, you’re prioritizing saving before you spend. You won’t miss money you don’t see.
Budget and Cut Expenses: Examine your budget to identify areas where you can reduce unnecessary expenses. The money you save can fuel your savings.
Maximize Retirement Accounts: Contribute as much as possible to tax-advantaged retirement accounts like 401(k)s and IRAs. These accounts offer a tax-advantaged way to save for retirement.
Start Early: The earlier you start saving, the more time your money has to grow through investments. Compounding is a powerful tool for building wealth.
Work with a Financial Advisor: A financial advisor can help you create a balanced plan that addresses your savings and investment needs, considering your risk tolerance and financial goals. (You can check out how to do that here).
While investment returns are essential to financial planning, keep sight of saving enough. Without a solid savings foundation, your investment strategies may not yield the results you hope for, and you could find yourself financially vulnerable. Striking the right balance between saving and investing is the key to a secure financial future. Remember, financial success is often a marathon, not a sprint, and it starts with saving enough to meet your goals and needs.
Samantha Kirby, CFP® brings more than 15 years of experience in finance and accounting to Creative Money and loves combining her knowledge and experience with down-to-earth practical advice. Sam is based in Bellingham and spends her downtime as the matriarch of a family of 5 who like to tempt fate with death-defying activities like mountain biking, hiking and generally running through nature exposed to predators (husband included). Read more about Sam here…
