SAVING TO
INVEST

There are various ways to save and invest—whether you’re young and looking to start with financial growth or an adult building a financial portfolio for the future. This article explores the path from saving to investing to help you attain financial freedom.

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Saving and investing are often used interchangeably, and that’s because they go hand-in-hand when it comes to potentially growing wealth. However, savings usually precede investing in terms of actual execution. Typically, you need to save first to build the investment capital you need.  

Understanding Your Income and Expenses

Unless you have a lump sum of inheritance funds or a huge amount of financial gift from someone, you’ll need to save first before you can invest. Saving habits are usually built brick by brick, with different strategies to compound your money and create the capital you need for investing.  

And before you can save, the first step is to build a solid financial foundation upon which other activities will thrive. First, you need to identify your income sources and track your expenses diligently. Understanding how your money flows will give clarity and help you create a realistic budget and savings plan.  

Moreover, tracking your expenses will help you plug the holes and prevent overspending on unnecessary items that can eat into your money and impact your savings. Also, you will be able to prioritise savings before discretionary spending. For instance, instead of splurging on an expensive piece of jewelry or a costly meal at the restaurant, you can create a system where cutting costs is paramount.  

Setting Financial Goals for Investment Success

After having the foundations set, you can now establish your saving and investment goals. Usually, this involves determining your short-term and long-term investment aims and creating a plan to achieve them.  

These plans must fit into your savings strategies and overall investment objectives. The timeframe must also be realistic, typically broken down into smaller investment milestones that you should be able to track easily.

For instance, imagine you’re saving towards short-term goals like an emergency fund or taking a new course. You must determine how much you need to save and the period. The information will help you create a budget, and you can continually track your expenses to ensure the dedicated amount goes to your savings.  

Automating Your Savings and Investments

After understanding how much you need to set aside periodically towards your savings goal, you need to remain committed to the plan. A good approach is to automate transfers to your savings or investment accounts per month (or whatever duration works for you).  

For instance, you can create a standing order on your salary account for automated payday deductions into tax-free savings accounts such as Individual Savings Accounts (ISAs) in the UK and TFSAs in the US. You can also use financial tools like savings apps with automated savings plans for effortless small savings which help you stay disciplined and reduce emotional spending.  

The Power of Long-Term, Consistent Investing

The investment market is filled with various opportunities and investment options. However, unlike savings that offer a consistent return on investment (ROI) periodically, investing comes with no guarantees, and you can always lose money.  

For instance, if you buy a stock and the company that listed it goes bankrupt, your capital may go down to zero. That’s why many experienced investors would recommend building a diversified portfolio with stocks, bonds, and other financial instruments.  

Typically, it’s recommended that beginners stick to low-risk investments to test the waters before committing more money to investing. One approach involves investing in exchange-traded funds (ETFs), which combine stocks and other assets from various entities which are held in one investment basket.  

You also don’t need to invest all your savings at once. If you try to buy a dip in the market you also risk buying at the top. The alternative dollar-cost averaging approach drip feeds capital into the financial markets and can be used regardless of what instruments you are investing in. It is one way to help you track, rather than try to beat the market.

Final thoughts

Saving to invest is a solid way to potentially attain financial freedom and stability. However, the journey requires steady financial growth, dedication, and discipline.

When starting, set your clear financial goals, build consistent savings habits, stick to the plan, and choose a reliable investment platform d to put your money to work and reap the rewards.  

However, always remember that investing comes with risk at every level. So do your own research and find the investment opportunities that work for you. 

To learn more about the financial markets for beginners, visit the eToro Academy.

FAQs

How is saving different from investing?

Saving usually involves setting money aside for short-term expenses like bills and vacations, while investing is for long-term goals like retirement and lump sum mortgage repayments.  

How do I start saving and investing?

This depends on your financial goals and earnings. However, taking out 20% of your income for a couple of months may be a good place to start. Build a solid savings habit and put your money in a high-yield savings account, compound enough emergency savings, and invest in any financial vehicle of your choice.  

What is the ‘compounding effect’?

Reinvesting any interim returns you make will increase the size of your overall investment pot. This results in a compounding effect and exponential growth. A virtuous cycle develops where the more you reinvest, the greater the size of interim returns such as dividends, which increases the size of your investment pot, and so on.