Adulting gets easier when you know how to go about saving and investing

Are you about to set out on your adult money journey... with many dreams, hopes, ideals and fears?

Are you experiencing the thrill of your first pay cheque with all the wonder at the possibility of what you could do with your earning power?

Or maybe you have a mild sense of panic? So many people have implored you not to blow it and all of a sudden, you are acutely aware that everyone wants a chunk of your hard-earned money.

There are millions of products out there shouting for your attention “Buy me, buy me, buy me!! You deserve to buy me. I’ll make your life better!”

And there are bills to pay as the responsibilities of the adult world settle in.

There might even be family and friends who feel that you “owe” them financial support now that you’ve “made it”.

There are the voices urging you to save and invest. But what does that even mean? There is an avalanche of information…

The great news is that saving and investing doesn’t have to be complicated. And anyone can learn how to become confident and competent with money.

Start by:

• Making sense of saving and investing;
• Identifying what’s important to you, now; and
• Developing an action plan to get started.

1.  What is the meaning of saving and investing?

Saving is used to accumulate money towards a specific, shorter-term spending goal. As your time horizon is shorter (generally three years or less), you don’t want the value of your money to go up and down with market movements.

Investing refers to setting aside money with a longer-term objective, such as financial independence. The idea is to grow your money as much as possible over the medium to longer term (five years plus) by taking investment risk in financial markets and sitting out any ups and downs in the market that come with that. When you have a longer-term investment horizon, the impact of short-term market movements generally even out over time.

2.  What are you saving or investing for?

Before you decide whether you need to save or invest (or a combination of both), get clarity about your money goals.

Do you need an emergency fund (a cash buffer for when “life happens”, be it a car breakdown, medical emergency, appliance replacement, family crisis or job loss)?

Are you saving for big ticket expenses? A deposit on a house? Your dream holiday? A car? A household appliance?

Or do you want to use your money to buy assets that generate an income stream that, over time, can replace the income you earn?

3.  How do I make sure I use my money for what I intended?

The clearer you are on what is important to you in life, and what the goals are you would like to achieve, the easier it will be for you to:

• Discern whether you need to save or invest;
• Work out how much to save or invest;
• Decide what financial products to use to meet your goals; and
• Maintain boundaries around the money you have set aside for specific goals.

Often we struggle with money boundaries because we are not clear about the purpose of the money we set aside.

The clearer you are on what that “future purpose” of your savings or investments is, the easier it will be for you to say “no” to other things that might undermine your efforts.

Having a goal will help you remain motivated and focused when the going gets tough (and sooner or later it will get tough)! Conversely, when you know you have set money aside for a specific purpose, it becomes easier to give yourself permission to use it for that purpose.

4.  Where do I start?

Once you know what your financial goals are, you will also know what time horizon you have to save for them.

If it’s a shorter-term savings goal of three years or less (and this includes your emergency fund which needs to be accessible in case an emergency arises tomorrow), the general recommendation is to use interest-bearing cash-based products.

These could include: an interest-bearing savings account or savings “pocket” at your bank of choice, or something like a money market fund. The idea is to use a type of product where the capital value of your investment does not fluctuate with market movements. It should only grow month by month as a result of the interest you earn on your savings.

If it’s a longer term investment goal where you are accumulating financial assets to help you on your journey to financial independence, your biggest risk is that inflation will erode the buying power of your money over time. To counter this, an investment portfolio with exposure to market-related assets has a higher chance of outperforming inflation than, for instance, a savings product which is only exposed to cash.

5.  What questions should I ask before I select a product?

• How does the investment or savings product work?
• What are the risks of permanently losing all of my money or a part thereof?
• What returns can I expect to earn? (Bear in mind that historical returns are not a guarantee for future returns. What they will show you is whether an investment has a reasonably steady track record, or whether returns are all over the place.)
• What are the costs to buy, hold and sell the investment? (Tip: avoid products that have exit charges or penalties.)
• How do I manage volatility? Short-term market volatility: the up and down movement of the capital value of your investment; is not the same as permanently losing your money. Those short-term volatility movements are part and parcel of what it means to be exposed to, for instance, the stock market. The impact of short-term volatility can be limited or completely overcome by adopting a long-term investment mindset and not switching in and out of investments during times of volatility. In short, we cannot manage volatility, but we can manage our response to it and choose to not react to short-term market movements.

6.  Three principles that work like magic

There are three things that will help you to saving and investment success no matter how much you have to save:

• Compounding

Compounding is one of those money terms that gets used frequently, without many people really understanding its importance.

Compounding occurs when your investment’s earnings or returns are reinvested to generate additional earnings over time. If you earn interest on your savings, and that interest gets added to your capital amount, you start earning interest on the interest you received. Over time, this has a snowballing effect that greatly accelerates the accumulation of your capital. So use the power of compounding to your benefit by reinvesting your earnings. Your future self will be delighted!

• Pay yourself first

Consciously decide to first set aside a portion of your income every month and save or invest it before you spend money on other things. This will build your savings and investment habit that will help support you as you pursue your dreams and goals.  

This is often a hard one to do as there are so many demands on our money. But it is like training a muscle: the more you practice doing this, the easier it becomes.

• Start today

Often we get stuck in the inertia of good intentions. The best time to start saving or investing is today. And with the increased flexibility and many savings and investment products with no minimum investment amounts, the barriers to saving and investing are fewer. So the minute you finish reading this article, get started!