When You Invest, You are Spending Your Money
Don’t think of investments as “money in the bank.”
Investing can be easy, if a person is willing to get a paltry sum. Becoming a successful investor is far more difficult. One mindset that is going to doom people to fail as investors is thinking of investing as a form of savings. It’s not.
Investing vs Savings
Investing usually involves putting money into assets that are higher risk and lower liquidity. Savings, on the other hand, must be low risk and should be highly liquid. Savings options are generally insured against loss, while investing options generally are not. Finally, saving money is a way to protect existing wealth. Investing really is spending in order to potentially create new wealth.
Saving money is important, especially when there’s a specific goal in mind. While it may take longer to get what you want, if you can squirrel away the money for a large ticket item, you can get it without paying high interest rates. However, if we’re saving money, that cash isn’t working for us. It’s nice to be able to put cash to work. Worse yet, inflation rates can be so high that we’re actually losing purchasing power over time. Losing 3–5% in purchasing power each year kind of sucks. When we invest, we’re purchasing the potential to gain significantly more purchasing power than what we have today.
Whenever we invest — whatever the investment is — we are purchasing a chance for future wealth. However, because we are spending and not saving, the way decide how much to invest, and what we do after we invest, must be different from handling savings funds. The amount set aside for investing should be considered spending money and should be considered used once the investment is made.
It’s a problem because investing is a great way to make our money work for us. It also helps fight against the loss of purchasing power that our money experiences because of inflation. It’s also problematic because only investing our spending money gives us less to invest and reduces our opportunities.
And yet, the tendency for people to try to treat investing as spending results in a lot of headaches. The biggest issue is that people will over-invest. They’ll spend far more than they should, and then be left with too little money. They’ll have to then pull from their investments, often with significant loss, which defeats the whole purpose of investing.
Give it Time
Investing is a purchase for the future, not the present. Investing is a long term process, and one that requires lot of patience and will power. It’s honestly something that I’m still working on. But that’s part of the benefit of spending carefully, and treating investing as a purchase, rather than savings. It will hopefully reduce the stress of leaving the investment alone to mature. Pulling the money too soon can result in lower gains, or even significant losses.
I like the set it and forget it method. Investing in a general fund, at regular intervals is definitely an option. Every week, or every month, a certain amount of money can be added to a fund. And the funds can be ignored after that. Again, make sure that there’s enough money in the budget. Also, the fund needs to be heavily diversified. An index fund that tracks the S&P 500 or something similar is one option.
Investing : Less Than $10K
Investing with larger sums of money is usually easier, but there are ways to reduce expenses if you’re investing less…
The above article discusses a number of different strategies for investing, when there’s less than $10K available. Motif investing is a good option, because an individual can develop their own fund, and readjust it on occasion. Keep in mind that investing is a long term project. It is something that takes years or even decades, rather than weeks or months.
Whatever option you choose, it’s important to remember that investing is buying something rather than saving for the future, and that once it is spent the money is gone. Never spend more than you can afford to lose. Never spend beyond your budget. If there isn’t enough spare money to invest, then sadly it’s probably not an option at the moment. Save rather than invest.
I am not a professional investment adviser. Please use this information at your own risk. It’s your decision how you invest, not mine.