Working Adults: When Should I Begin Investing?
Is investing better than saving?
It can be very confusing when people talk about savings and investing. People often mix them up and many financial services companies add to the confusion selling products with both components mixed in together.
This article serves as a guide as to what savings and investing actually mean and discuss a simple framework to decide if you are ready to start investing.
TL;DR: Both are important, understand your life situation first!
- It’s like deciding to eat an apple or an orange. There are pros and cons of each and both serve different purposes
- Savings is the idea of storing a bulk of cash for rainy days or when opportunities come for you to dive in
- It gives you a cushion for unplanned expenses or potentially planning for big expenses such as kids, starting a family etc.
- Investing is the idea of deploying your capital into the market and letting your money work for you
- When done correctly you will be able to beat inflation and potentially drive passive income (Returns = Capital gain + Dividend yield)
|Goals||- Short Term|
- Cash funds for unplanned or planned expenses
|- Long Term
- Beat inflation and grow your passive income
|Pros||- Liquidity for urgent uses |
- Freedom of choice to spend
|- Beat 2-3% per year inflation rate
- Can be easy if you do passive investing
|Cons||- Lose out to inflation 2-3% |
- Savings account will not grow
|- More returns most likely comes with more risk
- Best for long term
- Less liquidity for urgent uses in short term
|Types||- Savings account with any local bank|
- Under your pillow (in your Safe etc.)
|- Passive investing tools
- Exchange Traded Funds (ETFs)
- Blue chip stocks
- Funds, Unit Trusts
Am I ready to Invest?
Traditionally, people also believe that investing is superior to savings because it’s sexier and it seems like you are doing something with your money. Here are some questions you would need to ask yourself before jumping on the investing bandwagon.
Q1: Are you Debt-Free?
This is a very important question to answer. Simply if you are in debt, you are trying to fight a losing battle where you are paying off a loan at an interest rate which may be rendered redundant if you are trying to invest also. Here is a simple illustration:
You are in debt of $15,000 with an interest of 3% p.a. Instead of trying to allocate more funds to pay off the debt, you are trying to invest that additional funds into an ETF that yields 3% p.a.
Therefore, your NETT investment gain is 0%… hence you are effectively wasting the costs incurred and time to go back to square one where instead you should fight the negative yield (in this case your interest on your loan first).
Q2: Do you have enough savings?
Often, people assume that investing is for the short term. Research has proven that if you are in it for the quick-gains, it is likely you will falter and fall short. The long term passive investors likely are the ones who will ride out the bull and bear markets.
Hence, it would be essential to have at least 6 months of monthly expenses, just in case in a bear market, where you get retrenched etc, you are not forced to sell all your investments in a losing position or worse, take up additional loans to get back to square one again.
Q3: Are you willing to set aside investment funds?
We advocate setting aside a comfortable amount (~15 to 30%) of your monthly income for passive investing. In that same idea, it is likened to the concept of paying yourself first and having a job for every dollar. Only set aside investing funds which you do not need for the short term.
Q4: How much do you know about investing?
It is very crucial to not follow the herd-mentality in investing. Often the big losers are the one who follows a friend’s recommendation or stock tip but ends up getting burnt. What is important is to consider is your risk appetite and why are you actually investing for. Is it for long term retirement, to beat inflation etc?
To solve this last barrier, read up more from financial blogs or attend online youtube sessions to discuss the basics of long term passive investing.
Conclusion – Both are important, Manage them separately
You have to understand your current life stage to properly determine. Be very wary of agents and financial planners who try to sell you a mix of savings and investing products. These companies come up with funky names such as SAVEST, Investment linked policies (ILP), and Endowments plans to target the time-starved working adult crowd.
It is in my opinion that if you clearly define the goal of each category Savings vs Investing, there is no need to mix the two. There is a common misconception that it can be confusing and time-consuming to manage both savings and investments separately. In fact, if you can follow this strategy which works automatically.
I liken it to the idea where you would rather eat 1 full apple and 1 full orange rather than have 1/2 of each and losing out on the focus of the full nutrients that each can give you. Find out more on the different types of investment products available on the market!