The words saving and investing seem to always go together, like peanut butter and jelly, or death and taxes. And they do belong together, because before you can invest, you have to save. Saving is spending less than what you make and putting the difference aside for later. It’s delayed gratification, it’s the old fable about the summer ant and the winter ant. Saving is taking precautions against, and preparing for, an unknown and predictable future.
Investing takes that one step further, and it’s largely a function of your time horizon for the money you are making and saving. Savings is for money that you reasonably expect to need in the next three years or less; and the PURPOSE of savings is to be there when you need the money. Savings aren’t supposed to grow, they are supposed to be there when you need them. So if you lose your job at the same time the car breaks down and the roof collapses and the furnace goes out you don’t have to panic and you don’t have to scramble. You’ve saved money to handle the emergency. Savings are not volatile, the money is ALWAYS there.
Investing is what you do with the money that you are planning to use at least five years in the future. Investments are volatile, the price goes up and down on your investments every day, and all your money may OR may not be there on any given day. Investment money isn’t there to spend, investment money is there to grow. Investing is buying assets such as stocks, bonds, mutual funds, even real estate with the expectation that your investment will make money for you over long periods of time.
At Muhlenkamp, we help you to understand the when and what to “save” in a savings account and when and why to invest and which method is right for you today. And, when you make choices, it will depend on your risk tolerance and your goals for money. Our goal is simple, make our clients money.
How Much Should You Save?
Just a little bit more. Sir John Templeton was asked by an interviewer the secret to his vast fortune, and Sir John replied “Well, the first 20 years out of college I saved fifty cents from every dollar I earned.” Ladies and Gentlemen, if you learn to live on half of what you make, you will be financially independent, it almost doesn’t matter how you invest. The key to savings and investing isn’t what you make, it’s what you spend. Too many people say they will start saving once they make more. It never happens. Take whatever you make now, and save 5% for a few months. Then add another 5% to it. Then again, and again until you are absolutely broke the day before payday, then back off a notch. How much should you save? Just a little bit more. If you get to John Templeton’s level, I’ll tell you to stop.
If you deposited $2,000 per year at 3 percent annual interest, it would grow to $58,966 in 20 years (before taxes). The same $2,000 invested at an average of 10 percent a year would grow to $139,460 in 20 years (before taxes). ** It’s your job to save the $2,000 per year; it’s our job to try and grow it for you.
Saving can be Difficult Without a Strategy.
If you are aiming to put 20% of your income into savings, savings can include several methods. This strategy doesn’t just focus on your after-tax income. If your employer allows you to set aside money in a 401(k) retirement savings account, take advantage of it.
The strategy should include talking to a financial advisor about your future goals, needs, and wants. Financial advisors help people manage their money and reach their financial goals. There are different types of financial advisors like robo-advisors and online advisors. But at Muhlenkamp, we provide the personal approach. Everyone’s situation is unique and deserves personal attention, not a canned approach. Pick an advisor that will provide a holistic approach on topics like estate planning, philanthropic giving, and insurance needs.
We may all have 100 reasons why we can’t save, and they are all good and rational reasons. But they are short term reasons that are counterproductive to your long term goals and ambitions. ‘Your’ why for being financially healthy may be remarkably similar to your why for being physically healthy; to be able to watch and enjoy all the things your family is going to do and achieve and accomplish.
We would love to talk with you about your financial aspirations and needs. At Muhlenkamp making your money grow is our top priority.
The opinions expressed are those of Muhlenkamp and Company and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.