Savings have long been a cornerstone in building a strong financial foundation. For most of us, the traditional savings formula has been simple: “Income – Fixed Expenses – Leisure Expenses = Amount Saved.” However, in this article, I invite you to consider a paradigm shift and adopt a more effective formula for achieving financial prosperity: “Income – Fixed Expenses – Savings = Amount Spent on Leisure.” Why make this change, and how can you translate that savings into profitable investments? Here, we will unveil the mystery behind this transformation and provide key tips for getting started with investing, even with limited resources.
Reconfiguring the Formula for Financial Success
The traditional savings formula, where leisure expenses are deducted before considering savings, can limit our financial growth opportunities. By making this adjustment in the formula, setting savings as a predetermined monthly amount, we change the perspective. Here are three reasons to adopt this approach:
- Prioritizing Savings: By making savings a priority, you ensure that your financial future is secure, or at least more so than it would be without thinking about it in that way. Setting a fixed percentage of your income to save will help you build a financial cushion and, more importantly, force you to live within your means.
- Combating Inflation: Inflation is a silent monster that erodes the purchasing power of your money over time. When you allocate a portion of your income to savings, you are in a better position to deal with inflation. Keeping your savings in a non-invested account can be counterproductive, as inflation will eventually outpace your minimal interest earnings.
- Preparation for Investment: Prioritizing savings allows you to accumulate capital for future investments. Whether you want to invest in stocks, real estate, bonds, or investment funds, savings provide you with the fuel to kickstart your first steps into the world of investment.
The Right Savings Percentage
The common question that arises is, “How much should we save from our income?” There is no universal answer, as this depends on various factors such as your financial goals, current situation, and income. However, a widely accepted general rule is the 50/30/20 rule.
According to this rule, 50% of your income should go toward fixed expenses like mortgage, rent, utilities, and food. 30% would be reserved for leisure and entertainment expenses, and 20% should be allocated to savings. This 20% is your ticket to enter the world of investment. If your income allows you to save more, that’s great! The more you save, the faster your wealth will grow. We will soon explore the immense benefits of starting to invest early due to the magic of compound interest.
The Inevitable Threat of Inflation
Inflation is the silent thief of your purchasing power. Over time, the same money buys less, which means your savings can lose real value. For example, if you save $10,000 under your mattress for ten years, that money may not have the same purchasing power in a decade. This is a reminder of why it is crucial not only to save but also to invest wisely.
Investment is a strategy to beat inflation and make your money work for you. Assets that have historically outperformed inflation include stocks, real estate, and corporate bonds. By diversifying your investments across these assets, you can protect your long-term wealth.
You Don’t Need to Invest a Lot of Money to Start
Even if you have limited income, there are ways to begin your investment journey:
- Invest in Investment Funds: Mutual funds and exchange-traded funds (ETFs) allow you to diversify your investment even with a modest amount of money. You can purchase shares in these funds with just a few dollars.
- Buy Fractional Shares: Many investment apps enable the purchase of fractional shares, meaning you can acquire a portion of a stock, even if its price is high. This gives you the opportunity to invest in reputable companies without needing to buy a full share.
- Establish an Automated Investment Plan: Scheduling automatic transfers to your investment account each month is an excellent way to ensure you save and invest consistently. This approach is known as “dollar-cost averaging” and helps mitigate the risk of market volatility.
- Continuous Learning: Education is key to success in investment. Read books, take online courses, and stay informed about economic and financial trends. Over time, you will enhance your understanding and make more informed decisions.
- Seek Professional Advice: If you feel overwhelmed or are unsure where to start, consider consulting a financial advisor. A professional can help you design a personalized investment strategy and keep you on the right track.
Diversify:
Diversification is one of the keys to reducing risk in your investments. Don’t put all your eggs in one basket. Spread your investment across different asset classes, such as stocks, bonds, real estate, and perhaps even commodities and cryptocurrencies. This will help smooth out market ups and downs and protect your long-term wealth.
In summary, changing from the conventional savings formula to one that prioritizes saving as a fixed monthly amount is essential for achieving financial prosperity. Savings provide the foundation for investment, which is the key to beating inflation and growing your money over time.
Starting to invest, even with limited resources, is possible if you follow smart strategies and continue to educate yourself. Diversification is your best ally in investment, and over time, you can build a robust portfolio to help you reach your financial goals.
Do not underestimate the power of investment and the importance of starting early. In the financial world, time is your greatest ally. So, start today and open the doors to a more prosperous financial future.
