Finding the right balance between saving and investing

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Metrobank FVP Chorie Chan shares why a balanced portfolio starts with sufficient saving

Money matters so let us go back to the basics of money manners. Very often, one equates saving to investing. The starting point is about generation of income, accumulation of money, building one’s stash, and growing our balances in the bank. At some point, one begins to ask, what’s next?

While it is everyone’s aspiration to achieve financial stability and eventually financial security, it is imperative that the roadmap is clear. Here are some steps you can take.

Evaluate your personal balance sheet.

How much funds come in? Pause, take a step back, and take note of what you have now. What is your net income after taxes or your paycheck + income from other sources? Deduct expenditures. Classify into recurring and non-recurring.

Recurring expenses are common, programmable, and expected such as utilities, food, insurance premiums, education, loan amortizations, and IOUs. Add to the tab, average expenses on recreation, travels, clothes, etc.

Non-recurring items are those that may not necessarily happen in the normal course of everyday life. One may splurge in the latest television model, replace a vehicle, or worst, have health-related emergencies.

Assess your cash position.

Are you a net saver or are you a net user of funds? After summing up all credits to income and debits from expenses, what is left, if any, becomes one’s savings?

After all the math is done and one is counting on a regular paycheck or cash flow, it is safe to estimate the level of savings in the foreseeable future.

Determine your plans and personal objectives.

Do you have any plans and personal projects in the near, medium, and long-term? What are your big dreams for you and your family?

Begin with the end in mind before you go a step further. It is not uncommon that you don’t know the answers. That is an answer in itself. If there is any cloud of uncertainty, then it is best to set funds aside in a readily accessible account and take time to ascertain future moves.

Saving versus investing

The starting point of investing is saving. However, not all savers are investors, at least just yet. The road between both diverges on the following criteria:

Purpose. When one is at the early life stage of building up account balances and accumulating wealth, one may safely say that the purpose is to save.

Use. What am I saving for? Is there a need for these funds anytime? In case the unforeseeable happens, are these the only funds I can dip into? If the answer is on the affirmative, then the use of funds is for savings.

Time horizon. Am I going to need these funds any given day, hence the need to be liquid at all times? If yes, then save now.

Risk appetite. Conservative preservation of capital or the nest egg is critical. Keep it that way and save.

Objective. Safety. With balances left in your bank account, do not rush into investing. Ask yourself what your financial objectives are. Are these funds for emergency purposes and therefore, liquidity is paramount? Is it for more capital accumulation and long-term growth? Is it for building wealth to be passed on to the next generation?

If the answer is liquidity, the safety and accessibility are your objectives. Keep them safe and accessible. Save.

Why proceed to investing instead of settling for only saving? While saving is a perfect starting point, one must not stay idle excess funds there. As has been said, it is the surest way to wipe out wealth. Inflation makes your money lose value as it erodes your purchasing power. Investing, on the other hand, can further maximize what you now have. Investors graduate into a different mindset beyond the aforementioned answers of savers.

  • Purpose: To earn a considerable yield versus target benchmarks
  • Use: No immediate liquidity requirements
  • Time horizon: Medium to long-term
  • Objective: Long-term growth
  • Risk appetite: Can tolerate a considerable amount of risk

How will you find the right balance between saving and investing, then? It is imperative that while one is on the crossroads between saving and investing, financial education and literacy must be sought. Easy access to information with the vast channels through the internet, fund managers, banks, and even among family and friends is an enabler in itself. Understand the instruments and tools out there. Even when you do not have the investible funds ready, explore and thirst for information on various asset classes which are attune to the type of potential investor that you are or may become someday.

Depending on your personal objectives and use of funds, you may create a portfolio mix that allots a certain portion to savings and another to investments.  One does not have to be a hotshot, big-time customer to become an investor. With the availability of investment products, each investor has an opportunity to participate in the financial markets. Retail investors may tap pooled funds which is the gateway to tap various asset classes while customers with sizable investible funds may tailor fit their portfolio and directly invest in securities of their choice.

Select a sound and stable institution where you will deposit your hard-earned savings. Entrust your investments to professional and reputable investment specialists or portfolio managers with excellent track record of consistency and sound financial management. Put value in the market leadership, unparalleled diversity, and investment distribution capacity of your financial advisors.

As a last message, people ask me when is the best time to save? I would say yesterday. When is the best time to invest? The past is gone so the answer has got to be today. Waste time, no more. Begin your journey from saving to investing and enjoy the vast discovery!

Money matters. Start building your money manners.