Blogs | March 14, 2016

Running on empty? Balance money basics before choosing to invest

Iuliana asks: How much money, as a percent of salary, do you need to save before you start investing?


Ian answers: Iuliana, the truth is there is no specific proportion of your salary that “should” be saved before investing. Everyone has different income levels and priorities for their finances. A solid financial base that takes individual needs into account should be constructed first.

Build your core
Getting finances in shape can be a slow process, like training for a long-distance run – a hobby I personally used to enjoy. This means strengthening different core areas over time.
Think of the aching limbs that result from running marathons or even a 10-kilometre race without enough preparation. Without a solid base, the chances of running well are slim.
The same is true when managing money. So create a budget. Then stick to the amounts set, and if they don’t work, revise them.
Build an emergency savings fund of three to six months take-home pay. Save regularly into a pension fund. What about other financial priorities, such as long-term loans, or a mortgage? Are there any other debts and what are the relevant interest rates? There may not be much left over after that.

Racing to win?
Saving is typically considered safe and investing risky.
Emergency money should be available at short notice for when times are tough – for example, if you lose your job or in an economic downturn, when investments such as shares or property may well lose money. Investments may also difficult to sell quickly for a good price.
That’s why many experts, including billionaire investor Warren Buffett, say having a separate emergency fund is essential. This means sticking to the principle of diversification and not putting all your eggs in one basket.
A sum of money held in a bank account or government bonds will probably grow slowly – if at all. Share prices can rise more quickly – and they can fall.

Set your goals
I’ve got good news for you. You don’t need to start investing if you don’t want to, or just because others say you should. Just as nobody needs to run a marathon if they do not want to, there is no need to invest if your financial basics are in good shape.
So, in my opinion, asking whether to invest a certain percentage of your salary isn’t really the point. Building a dependable foundation for your finances is more important.
Does investing really have a place in your “big picture” for the future? Set a specific goal and work out if you can achieve it. Investing purely for the sake of it seems strange to me.
Research suggests, too, that investing in experiences may make you happier than watching the value of your investment account rise and fall. It is possible to spend too little and save – or invest – too much.

Breakdown
I no longer run; injuries and time have taken their toll. But I can enjoy activities some my age cannot if they never built a good base. Financially I hope I have done the same. Iuliana, build your base first. Then invest if you want to.

InvestingSavingBudget

Ian Bright
Ian Bright

Senior economist at ING
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42 blogs

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