savers

What is worse than being unemployed and broke? My answer is being employed and broke. If you are in-between jobs or unemployed, people will readily empathize with your financial hardships and you can count on one or two people to help you through the rough patch until you get back on your feet. The story is however somewhat different if you are gainfully employed and you still have money problems. Most people will assume that you have a bad indulgence such as gambling or you are a wasteful spender.

In most cases when employed people are living from paycheck to paycheck (or in debt) they often erroneously assume that making more money will solve their money problems. However, I have observed that more money doesn’t always solve money problems for people living from paycheck to paycheck. Lifestyle inflation often causes their expenses to increase as soon as they get a raise at work; hence, they are always stretching the dollar.

Everybody exists in a financial continuum of being an earner, spender, saver, and an investor.  You’ll always have money problem if you are spender, you’ll be stuck financially if you are a saver. Investors earns more money to get on the fast track to financial freedom. This piece provides three practical insights to help you move from being a saver to becoming an investor.

Understanding that savings has its inherent usefulness

A savings account has its role to play in your finances and you’ll be doing yourself a great disservice if you invest all of your money without making any savings. A savings account can help me you meet short term financial needs – an emergency saving funds is especially important to cover expected expenses. Many Americans don’t have enough savings to cover an unexpected $300 bill and they’ll need to sell something or borrow money to meet such needs. Hence, before you start your investing game, make sure that you have set some money aside – having savings apart from investments will protect you from cashing out of your investments prematurely.

ROI will always outpace savings returns in the long term

One of the reasons many people are stuck as savers instead of graduating to become investors is that they often mistake market volatility as risk. If you have $1000 in a savings account, your $1000 today will still be $1000 (at face value) next week, next month, and next year. In contrast, if you put $1000 in stock market today, you’ll “lose” some of that money in transaction fees, the market might dip and your $1000 becomes $950 overnight.

However, Seth Ingram, a trader on Stern Options  observes that “market volatility is a normal part of investing; yet despite the rise and fall of the market, an investment account will almost always outperform a savings account.” To start with, gain from the most conservative mutual funds will outperform the rate at which inflation will erode the purchasing power of the dollar.

Diversify your investments

When you want to start investing, you’ll have the option of putting your money into three broad categories. You can invest in low-risk assets that yield low returns, medium-risk assets that yield medium return, and high-risk assets that yield high returns. A number of factors such as time, available capital, and market knowledge will determine the assets in which you put your money. However, you should strive to have a mix of conservative and speculative investments in your assets. You should also diversify your investment across different kinds of assets, and across different sectors of the economy. You should also take the time to seek the expertise of a financial adviser who will help you get started on your investment journey.