Savings Come Before Investments – Are You Saving and Investing Enough?

Given life’s vagaries each of us would like to save and invest our hard-earned money to tide us through the rainy days, and the occasional black swan, when they come. Where we err though is to jump headlong into “investments” just because we need to be seen with the “crowd.” Someone in the next cubicle made a neat killing on that small-cap stock…so investing in small-cap stocks is the way to go. Let me invest all of my money there. Wrong! Did you stop for a minute and think about any of the following: “Do I have a BIG fat emergency fund in place?”, “Have I planned for those annual expenses (they are investments, vehicle insurance, gym fees, et al.) that seem to popup each month?”, “Have I planned for all those expenditures that I know will happen within the next 6-months?”.

Investing before saving is akin to building the first-floor of a house before the foundation and ground-floor. Looks nifty but is a house of cards eagerly waiting to collapse at the first wind. You should never plan your finances to be this house of cards. Remember this mantra: Savings are for short-term goals. Investments are for medium and long-term goals. Savings always come before investments. I like to think of anything less than a year away to be short-term, between a year to three years away to be medium-term, and more than three years away to be long-term. Get this simple formula right and you’re well set for a bright and prosperous financial future.

With a myriad of savings and investments options available at your fingertips today how do you decide where to save and where to invest. Short-term goals require instant access to your money and full safety of principal for which bank savings accounts and liquid mutual funds are perfect options. Medium-term goals require safety of principal and a small amount of growth for which money-back life insurance policies, recurring deposits, fixed deposits, and debt mutual funds are typical choices and some of these choices such as insurance are tax effective too. Long-term goals require a large amount of growth for which, endowment and unit-linked (equity-oriented) life insurance policies, and equity mutual funds are great choices.

Insurance deserves a special mention. To those of us who are too busy to manage our finances insurance in various forms serves as the perfect vehicle for meeting our savings obligations and investments goals. From money-back insurance policies that return cash back to us at regular intervals, to traditional endowment insurance policies that accumulate money over the long-term, to unit-linked insurance policies that have a growth component (and not to forget, should something happen to you, all life insurance policies come with an automatic payout benefit to your near and dear) insurance can help meet your savings and investment targets. I view health insurance as an investment too – just think of it as a future investment into your own health and into your family’s health.

Once you’re on this path to financial prosperity, the very next question that comes to mind is “Am I saving and investing enough?” Really a tricky question to answer because as John C. Bogle would perhaps ask you: “How much do you think is enough for you?” My advice to everyone who asks me this question: Clearly write down your short, medium, and long-term goals. Then write down how much money you specifically need to set aside each month for each of these goals. Got any spare cash left? Save it. Or invest it. Or splurge it. The choice is fully yours to make. And that to me is enough!

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