Yes I did, here: Financial Freedom & The Cashflow Quadrant.

Told you.

So here we go.

Let’s start with the key premise of this article. You should be doing BOTH. There are plenty of articles out there answering the question ‘Should I save or should I invest?’.

No, no, no, no, no.

Not Save or Invest.

Both.

I’m going to address the next major objection (affordability) shortly but let’s first look at what these two things are:

(for this I’m going to re-use what I already wrote a few weeks ago to save you hopping between articles. I have a rough idea this might be a no-no in blogging, google website land but I’ve given up trying to follow the rules a long time ago, it is clearly more convenient for anyone reading this to have the definitions right here, so here you go…)

Saving vs Investing

Saving is putting money aside in a safe place such as a savings account in a bank (ideally with a decent rate of return which may be achieved due to certain restrictions such as access to that money being quick but not necessarily instant).

Investing is trying to make your money work for you by committing it to some endeavour, project or bet in order to try and make a profit, in financial terms known as a return or return on investment (ROI). Investing may commonly be understood to be in financial market instruments such as stocks & shares, bonds etc but investment can literally be in anything at all that might give you that return so also includes property(real estate), buying assets that you can later sell at a higher price, businesses, trademarks, loans, copyrights, horses, watches, royalties, jewellery, contracts… anything in fact, the boundaries of what you can invest in are limited only by the imagination of those involved and the agreement (or ‘contract’, formal or otherwise) between the parties involved. Obviously the more obscure, creative or non-standard an investment is then the more careful you have to be (because it’s probably more risky and if it’s really obscure or promises too much in terms of great returns, it could well be a scam) and the more you need to do your due diligence.

Risk vs Return

In general terms, investing is more risky than saving.

Of course it should be because the aim is to try and make a better return on your money than you would from simple savings, the cost of this better return is that you are taking more risk with your money.

Furthermore, the general rule is that if you want to make higher returns, then you need to take more risk.

This is also driven by market forces – I’m at risk of going off on a huge tangent on this one as there is potentially a lot to say on this so I’ll park that one for now, suffice to say the market can play it’s part in determining and influencing the risk profile of an investment, particularly over time.

Is All Investment Risky?

Nope. No it’s not. Well, not really. No I don’t think so. Depends.

Hold on a moment, what do we mean by ‘Risky’?

If we mean High Risk, then no, not all investments are risky.

If we mean Medium Risk, then no, not all investments are risky.

If we mean carrying any risk at all, even a smidgen, then yes, al investments are risky.

But then so is living, so is crossing the road. So is everything.

The point I’m making is that there are high risk investments and there are low risk investments. If we really want to get into it, then we could have a discussion about specific cases where the investments are less risky than the savings (which theoretically shouldn’t happen but it can – because there is risk everywhere when you really get into it, the point is understanding it and managing it).

For now, let’s consider if it’s something we could do & whether we are willing to make a little space for it, then if we can get that far, I’d suggest you go and do your research (very easily done), get started with some saving (very safe) and some safe investments then evolve from there.

What Are My Savings For?

Good question.

Well, it’s up to you really.

In my case, I hope to never touch my savings and in which case, they will pass on to my children when I leave this place (le Terre). Dual purpose though, it’s also good to know that they are there in case I need them (i.e. they provide security).

For a lot of people savings are for long term goals – they may also be for large expenses such as weddings, houses etc. in which case you would use these to stop a sudden, huge hit on your regular finances, obviously your savings would diminish but having taken that impact and provided you with something (the long term goal) and then you go right back to building up your savings again for the next one.

Investments are obviously about making money and getting a return on a portion of your capital (money), I’m not going to write a whole section on that.

What If I Can’t Afford To Invest?

These days investing is easier than it has ever been before.

As is researching how to invest – thanks to the internet & the abundance of free and good quality information on any given subject. To prove my point I just whacked into the search bar: ‘How To Invest Small Amounts of Money’ and the following articles came up:

• 5 Ways To Start Investing With Little Money
• 15 Ways To Invest Small Amounts Of Money
• Regular investing: whether you have £10 or £500…
• 13 Great Ways to Invest Small Amounts of Money This Year
• How to Invest Small Amounts of Money Wisely: 12 Steps
• How to Start Investing With a Small Amount of Money – The Balance

and there are many more articles and videos on the subject (as you might expect these days, there’s just tonnes of information online about pretty much everything).

10-15 years ago, ‘I can’t afford to Invest’ is a much more understandable problem, these days less so, but here’s the thing:

Despite the above and the fact that you can invest small amounts, I completely get the argument that even a small amount may seem like a waste of time or money or time or money you still can’t afford.

What I’m interested in and want to encourage you to do is to form a saving and investing habit.

The amount is really not important.

I’d far rather you invest $1 per month every month than you go out and invest $500.

How do we do that?

Question: Assuming you’re not losing any of the remainder, but just placing it somewhere else (in savings and investments), could you afford to live on 90% of what you earn now?

If you can answer yes to the above question, it doesn’t matter what your income is, you should consider this split:

• 5% Monthly Income into Savings
• 5% Monthly Income into Investment
• 90% Monthly Income Everything Else

The 5% into Savings and Investments should be the first thing you do each month when you get your monthly income (assuming it is monthly, if it isn’t, then you can either simulate this using feeder accounts or just calculate what your income would be broken down monthly and work out the figures from there).

If you answer yes easily to the above question, you may want to consider a 10/10/80 split.

If you answered No, ask the same question with 96% or 98%.

The beauty of this system is in getting started and it will work at most, if not all income levels.

Let’s have a look at how this would work with some basic modelling:

Regularly Saving & Investing 5% of a $12K Net Income

If you earn $12,000 Net per annum then that would have you putting $50 into savings and $50 into investments every month.

$50 per month, that’s pretty good but still, why bother saving/investing this money?

Let’s take a look:

If your savings made 1% per annum and your investments were made at an average interest of 6% per annum, in 12 years you’d have:

• $7,653 in savings (making an extra $453 on your savings from the compounded 1% interest)
• $10,560 in your investment account (making an extra $3,360 from the compounded 6% interest)

If your savings made 2% per annum and your investments were made at an average interest of 12% per annum, in 12 years you’d have:

• $8,143 in savings (making an extra $943 on your savings from the compounded 2% interest)
• $16,113 in your investment account (making an extra $8,913 from the compounded 12% interest)

Not bad eh? Obviously if you didn’t do this you’d have: nada, you’d have spent it on milkshake and chips.

Regularly Saving & Investing 5% of a $90K Net Income

If you earn $90,000 Net per annum then that would have you putting $375 into savings and $375 into investments every month.

If your savings made 1% per annum and your investments were made at an average interest of 6% per annum, in 12 years you’d have:

• $57,396 in savings (making an extra $3,396 on your savings from the compounded 1% interest)
• $79,200 in your investment account (making an extra $25,200 from the compounded 6% interest)

If your savings made 2% per annum and your investments were made at an average interest of 12% per annum, in 12 years you’d have:

• $61,076 in savings (making an extra $7,076 on your savings from the compounded 2% interest)
• $120,845 in your investment account (making an extra $66,845 from the compounded 12% interest)

What???!??? Crazy, eh?

Such is the power of compound interest.

I told you all about this too recently by the way (specifically with a tip for how to quickly calculate how long it takes for your money to double). Didn’t catch that? Here it is: How To Double Your Money with The Rule of 72

If you want to play around with your own numbers or even model some numbers you’d like to get to, an easy way to do this and play around with different numbers and different levels of investment is just to do an internet search on ‘compound interest calculator‘ and plug your numbers in there (try the above ones if you didn’t believe me).

Note: This article is not going to tell you how to invest or even where to invest but simply that you should.

(there’s plenty of good info on both the how and the where out there and I can also elaborate if you want a chat about my particular preferences in the comments or via email)

Final Thought: What’s The Secret?

I’m glad you asked.

The secret is to start saving and investing.

Yes, do both.

The amount doesn’t matter anywhere near as much as setting up a process to do this regularly (I’d suggest monthly).

Here are your 6 steps to getting this spot on and putting yourself a huge step closer to wealth and financial freedom than the majority of people who don’t do this:

1. Do Both – Save and Invest
2. Start as early as possible – like now (I wish I’d started investing from an early age!!)
3. Set up regular saving and investment, even if a tiny amount (make it a habit) – can you afford to put 5% into savings & 5% into investments every month? If not, choose an amount that you can afford, you can always adjust it later
4. Make it a system, don’t skip any payments, you can add ad-hoc payments to your savings and investments but don’t touch these otherwise & avoid taking money back out except in absolute emergencies (for obvious reasons), make it sustainable (consider automating it if it helps)
5. Once you’ve set this up, go slowly. Be cautious and conscious of the risk/return ratios you want to go for in your investments. Do your research and try and maintain a balanced portfolio. If in doubt, choose very low risk investments (e.g. low cost index funds – look it up)
6. Go and make yourself a cup of tea – you’ve earned it 😉

This article is only intended to give you a nudge in the right direction. If you find yourself more open to investing and wanting to know more after this little nudge, great! You can thank me later, now you’ve got some learning to do (after your cup of tea, obvs).

The good news is it’s actually pretty easy to get started fairly safely (given there are risks involved) – there are all kinds of resources out there, articles, videos, apps – plenty of the latter and little robots (roboadvisors) that can do lots for you such as managing your risk, balancing your portfolio & making sure you have a set process.