After several years of employment, you should be in a fortunate situation of generating more income than your expenses. Where to put it and how to utilize it is always the question when it comes to excess cash.
Generally, there are two options available: saving and growing your money. While both acts involve setting aside money for future use, they differ in terms of purpose. Knowing which path to take plays a significant role in gaining financial freedom.
To Save or to Grow
Saving money is usually done when you don’t have enough money to purchase something you want or need at the moment. So you have to keep a portion of your salary until you do. The most important aspect of saving is ensuring that you have enough money whenever you might need it.
On the other hand, growing your money means putting your savings on another asset for it to increase faster than it would on a regular savings account. Greater returns are achievable by accepting a higher risk, which means that you must face uncertainty in its progress and value.
Setting Your Goals
Setting specific goals will help you decide where to put your eyes in terms of savings and finances. According to experts, our goals should fall under three categories. Each area dictates how you must handle your money.
Short-term Goals
If you have short-term goals like buying a car, you need to ensure that you can quickly turn around your assets into cash. Doing so will assume the least possible risk since you want to be confident you will have the necessary fund at a particular time.
Medium-term Goals
For medium-term objectives, such as buying a house, the priority must also be to have an appropriate amount of funds accessible whenever you need it. Although increasing your money is also a part of the goal, you need to stick with slightly low-risk assets. Suppose you’re lucky enough for your savings to grow as you anticipate. In that case, you will gain more flexibility to afford your home faster.
Long-term Goals
According to experts, investments provide a far higher return of income than saving from bank accounts. This concept is particularly true after several financial crises through the years. Central banks had a history of holding interest rates at zero percent during an economic meltdown. You can withstand short-term volatility in your savings and investments over time to obtain a better long-term return from bonds, stocks, and other commodities.
Investments
Putting your money on various assets to gain additional income is an easy decision to make. Choosing which investment to pursue is the real challenge. Most individuals concerned about investing come around to the concept after learning enough about the anticipated long-term returns in the stock market along with its risks.
One approach to overcome the anxiety of making an investment for the first time is to hire a financial adviser. More so, you need to do enough research about the existing market trends. Since home renovation projects and outdoor remodeling are becoming a trending topic, many think of taking a lawn-service franchise opportunity. The decision lies on several factors, including your potential clients, location, and capital.
The Pareto Principle
For the most part, most individuals will want to combine a balance of savings and investments. You’ll put money aside for future transactions and put more money to increase your fortune.
There are no fixed amounts or proportions for how much money should be kept in a savings account versus an investment account. It all relies on your current financial status. But for some individuals, follow a common rule known as the Pareto principle.
This concept serves awareness that the connection between inputs and outcomes is not balanced. Thus, eighty percent of the consequences come from twenty percent of causes.
Choosing your Path
As you would expect, there is no clear victor when it comes to saving or investing. Both have their respective advantages and disadvantages. Nonetheless, it all depends on your personal needs and financial situation.
When laying the groundwork for your personal finances, the basic rule is to prioritize saving if you really need money now and investing if you need money later. Other than your financial objectives, you should consider your risk tolerance as well. If you are worried that your investment might take a loss at some point down the road, you might not be ready yet.
When deciding where to save your money, you have many options, both for the immediate and distant future. If you want to enjoy financial freedom until you retire, the best time to start financially wise is now.
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