Once one finally has saved some money, how to allocate between savings and investing?
How to find the balance needed between saving and investing?
Let’s review once again how positive fincial responsibility works.
The Standard Process
The road to a financially free and stable life begins with these several steps:
1. Live below one’s means. This means spend less than one earns.
2. Build an emergency fund. This means to save money.
3. Save and Invest the balance. This means to split what is saved into two parts: one part saving, one part investing.
Once expenses are covered, how to apportion one’s money between savings and investing? Let’s look at the decision to be made.
The emergency fund is for emergencies.
Keep that emergency fund in your back pocket. Don’t use it for major purchases. A new vehicle, a new home, to get a business of the ground, and so on… all of these need funds. They usually are not seen as emergencies.
What I am not saying is to invest all one’s money. We need to keep some liquid assets available. While we have an emergency fund, there are times we need cash for purchases that should not come out of the emergency fund.
The Question
So the question now come does to how to divide one’s funds between savings and investing. My take on this is an opinion, and every has their own perspective. But at the beginning, I would start with not more than 20% for investing, and the balance for savings. Once the savings have accumulated to a substantial sum, then I would then consider adjusting to a somewhat larger investing portion.
Fun But Not Funny
While I consider dividends and dividend investing a pleasure worth aiming for, caution should always be one’s watchword. Investing, especially dividend investing, is for the long haul. As a result we need to remember that one’s daily expenses come first. We need to prioritize living our lives and paying our expenses, and then preparing for the future. When mentioning “live below one’s means” in Step 1, above, that sets the stage for positive change and a bright and properous future. The “less now, more later” approach does not mean heedlessness. Take care of oneself first.
What is your take on ths topic? Let me know here.
The illustration of mushrooms is from an 1827 set of lithographs by A. Cornillon from Michel Étienne Descourtilz’s “Atlas des champignons: comestibles, suspects et vénéneux (Atlas of mushrooms: edible, suspect and poisonous).” Courtesy The Biodiversity Heritage Library at the Smithsonian Libraries and Archives in Washington, D.C.
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