My Savings & Investment Strategy
The decision to invest savings should always be made on the basis of prudence and adjusted to personal risk profile. Here are some elements that help me organize my personal finances.
- “Pay yourself first”.
- Start saving as soon as possible.
- Define your investment goals and strategy.
- Evaluate the risk of your investments.
- Diversify your investments.
- Hold your investments.
- Reinvest your earnings.
- Take close attention to inflation.
- Reduce the tax burden.
- Evaluate transaction and processing costs.
“Pay yourself first”
The main idea behind “pay yourself first” is to ensure that you make your chosen savings contributions month after month upfront. It removes the temptation to skip a contribution and spend the funds on expenses other than savings. Regular, consistent savings contributions go a long way toward building financial freedom.
Since my first payroll, I decided to save a regular amount as savings. Even with all the bad decisions I made, this is a golden rule for me.
Start saving as soon as possible
The sooner you start saving, more quickly you’ll see your investment returns.
In this graph, you can see how savings evolve, assuming that each individual saves 10.000 euros annually and both get a 5% return on their investments. The only difference between the two is the amount of time they have been saving. Person B, which has started saving since the age of 35, will get 43.219 euros. As for Person A, who started saving since the age of 25, when he reaches age 65 he will get 70.400 euros. Much more than that Person B, which began 10 years later.
Define your investment goals and strategy
You need to know what to do with your savings. The first step in successful investing is to define measurable and attainable goals. It’s helpful to ask yourself, “Why do I want to invest?” There are lots of goals, so really think about what you are hoping to do financially.
Are you investing to:
- Pay for your wedding?
- Take a vacation?
- Have funds to start a new business?
- Income stream for retirement?
Next, arrange your goals by the time horizon for achieving them: short-term, mid-term and long-term. But also decide how much you’ll need for each goal.
Regarding strategy, you want options that offer high return with low risk. My personal strategy possesses the following elements:
- Short-term reserves: enough to support 6 months of family expenses;
- Low-risk, high liquidity assets: enough to support 12 months of family expenses;
- Portfolio investments to maximize returns.
The idea behind this strategy is to ensure that I have the necessary funds to overcome any immediate financial emergency.
Evaluate the risk of your investments
Most people do not look for risk in their day-to-day life, but when it comes to applying your savings, taking some risk can bring potential gains. You need to choose the level of risk with which you are comfortable and being able to resist the mistakes that eventually will happen based on your decisions.
Diversify your investments
“Don’t put all of your eggs in one basket.” The idea is to create a portfolio that includes multiple investments in order to reduce risk. Consider, for example, an investment that consists of only loans issued by a single lending company. If that company suffers a serious downturn, your portfolio will sustain the full brunt of the decline. By splitting your investment between loans from different lending companies, you can reduce the potential risk to your portfolio.
Hold your investments
Holding is a passive investment strategy for which you commit your savings and keep them invested for a long period regardless of particular personal needs. Take this idea into consideration when defining your investment strategy.
Reinvest your earnings
This idea assumes that the income from interest, dividends and capital gains from your investments will be added to the initial investment and, therefore, new incomes will be calculated on higher amounts. Simple as this idea may seem, it has very important effects on the income you will get from your savings.
Take close attention to inflation
You should always consider investments that outperform the effect of rising prices in the economy, otherwise, the valuation of your investments will be fictitious, insufficient to maintain your purchasing power. If, for example, the average inflation of the last 3 years was 3%, and you want to make a long-term savings plan, you should invest so that your return will be more than 3% per year.
Reduce the tax burden
One of the factors that most influence the profitability of your investments is taxation. The effect of taxes on the growth of long-term investments can be as important as the evolution of investment itself. It is important to take into account the fiscal impact when choosing your investments. A high-yielding product that presents a high tax rate may be a worse choice when compared with the eventual lower profitability of another product that presents tax advantages.
Evaluate transaction and processing costs
When considering the profitability of any investment, a factor that typically goes unnoticed are the commissions that apply to each product, both explicit (commission of maintenance, underwriting, reimbursement or brokerage) and implicit (commission of management, depository). Minimize them to maximize your returns.
Do you want to Invest?
Check among the P2P crowdlending opportunities available on Savings4Freedom, always taking into consideration that all information is entirely based on my personal experience.