By Solange Moniquette
Manager, Investment Services, Advisory Services Department
Unit Trust Corporation
Investing and saving are terms that people tend to use interchangeably. Even though they are both important and can help you to achieve your financial goals, they are quite distinctive. Knowing the difference between when to save and when to invest is crucial.
Saving, the more common term, is an essential cornerstone for a good financial foundation. It refers to money that you put aside for use in the future. You can save a portion of your income to purchase or pay for more expensive items such as furniture and appliances, electronic gadgets, a vacation, a down payment for a car or a house.
Experts also recommend that you set aside separate savings – approximately three to six months of expenses – for unexpected emergencies. Generally, people tend to place these funds into accounts which can be easily accessed when required, such as savings accounts and money market investment funds.
On the other hand, one of the main reasons for investing is to grow your money either from appreciation or income generation. Usually this can be achieved by buying assets that have the potential to increase in value. In the financial sector you can invest in stocks and mutual funds, property can also be an alternative investment.
A common mistake that many people tend to make is to have a random approach to investing. However, for you to be successful you first need to know what you want to achieve, thereby allowing you to fully evaluate and understand the purpose behind each investment.
Goals-based investing helps to keep you motivated. Additionally, you are better able to keep track of your progress as you have your goals in focus. This is even more effective if you use separate investment accounts for each goal because at any moment you will be able to tell exactly how much money you have accumulated towards each one.
Timeframe : Saving vs Investing
A useful method to help you determine which of your financial goals you should invest for, instead of simply saving, is to consider the timeframe. A general rule of thumb is that you should save for short term goals which range from one month to one year, whereas you should invest for long term goals which are usually achieved in five or more years.
In terms of your investments, not only do you have other priorities fighting for your money, but when you invest in the financial markets, you may be inclined to worry and even be tempted to exit the market when it is experiencing volatility or worse, a down cycle. However, you need to remain invested and stay focused on your long-term goals because you can cause more harm than good by trying to time the market.
It is best to put a system in place – set up a standing order to invest a specific amount monthly – and stick to it as it can prevent you from reacting adversely to changes in market conditions. Experts suggest that you invest at regular intervals thereby removing the guess work of having to predict when the value of your investments will rise or fall.
Don’t depend on emotions
For instance, with dollar cost averaging which is investing a fixed dollar amount on a regular basis over a long period of time, in an investment such as a mutual fund, can improve your financial well being. The benefit: this investment technique reduces downside risk, i.e. when market prices fluctuate, it lowers or balances the average cost of your shares over time. Standing orders and salary deductions are good options to facilitate disciplined, regular and consistent deposits to your mutual fund accounts. Automate your investments for the long term and walk away knowing that over time the best performance comes from simply staying invested and focused.
Studies have shown that investors who jump in and out of the market tend to make sub-optimal decisions when emotions take over. Typically, when investors sell at times of panic they sometimes miss out on subsequent gains. In fact, investors who stayed the course have the potential to receive substantially higher returns than their peers who try to time the market. All you need to do is start. Getting your finances in order is not a one-time task, it’s an ongoing process which requires regular, reliable attention and the right set of tools. A financial advisor can help you stay disciplined and focused on a long-term plan.
Contact a UTC Financial Advisor today to help stay disciplined and focused on your long-term goals.