Saving and Investing

Wondering whether you should save or invest? The answer is yes!

Both are necessary for a well-balanced financial future. Saving is putting money aside, bit by bit, for a specific purpose. Saving is a way to reach short-term goals, usually the things you plan to do within the next five to ten years.

We encourage everyone to start saving by building an emergency fund, first by saving $1,000, then by increasing that fund to cover 3 months’ worth of living expenses, then 6 months’, then a year.

This emergency fund provides some level of financial security when the unexpected occurs. Sooner or later everyone gets hit with unpleasant financial surprises.  One of the appliances conks out, or the car needs a repair, or you have to cover the deductible for a medical expense. The worst financial emergency may be losing your job. The emergency fund allows you to pay for the emergency without going into debt. For longer-term issues, such as a job loss, you’ll have money set aside for necessary costs such rent/mortgage, food, insurance, transportation, and utilities.

The most effective way to save is to make it automatic. When you receive money, the first portion should go to the Lord. The second portion should go to your savings. If you make saving a habit and do it as soon as you receive the money, you’ll save more.

The Bible does not define a specific amount to save. We recommend saving at least 10% of your income. This may seem like a huge hurdle and it may not be possible right away, but begin the habit now, then set a schedule to increase your saving to reach 10-15% over a period of time.

Like the ant, we should be wise and plan for the future. “Four things are among the smallest on the earth, and yet are exceedingly wise: Ants—a species not strong, yet they store up their food in the summer.” Proverbs 30:24-25. Saving for our future is similar to the ant storing up food for the winter.

Money for short-term goals that will occur in one to ten years should be saved in cash equivalent products, such as a savings account in a bank/credit union or a money market account. When you need access to your short-term savings, you want it to be available immediately.

Investing is a long-term plan for money that will be needed in 10+ years. Investing can help you reach long-term goals, such as paying for a child’s education or planning for retirement. Investing means taking some of your money and trying to make it grow by buying things you think will increase in value, such as stocks, shares in a mutual fund or real estate.

There is always some level of risk involved with investing and there is no guaranteed rate of return on any investment. It is possible to lose some or all of the funds you have invested. Every investment has a cost: financial, time, effort, and sometimes emotional stress.  For example, a rental house will take time and effort to maintain, and if you can’t find a renter there is a financial drain. Before deciding on any investment, be sure you have explored the personal costs.

Depending on the investment vehicle you choose, it may take longer to access the money you have invested. For example, if you have invested in real estate you’ll have to sell the property in order to withdraw the cash you have invested.

The only time you shouldn’t save, or invest, is if there are more important things you need to do with your money. For example, if you are paying off debt, you should start saving for an emergency fund, but paying off the credit card debt in order to escape paying interest on the debt is more important than investing. Or, if you are the only breadwinner in the family, you need to have your financial house in order before diving into investing.

Unfortunately, most people are not consistent savers

• 39% of Americans have no savings.
• Almost ½ of Americans don’t have $500 in an emergency fund!
• 36% of Americans are not saving for retirement.

Saving is the starting point for investing. Saving money should always come before investing money. Think of savings as the foundation upon which your financial house is built. If times get tough and you require cash, you don’t want to cash in your investments if there is a downturn in the economy. The stock market in the short-run can be extremely volatile, losing more than 50 percent of its value in a single year, but over the long term, it will return more than a simple savings account.

If your employer offers a 401K savings/retirement plan and there are any matching funds available, take advantage of it. Putting money into a 401(k) plan at work if your company matches your contributions is a great way to build your long-term investments. That’s because not only will you get a substantial tax break for putting money into your retirement account, but the matching funds basically represent free cash that is being handed to you on a silver tray.

While the amount you need to invest is highly personal, and specific dollar amounts can be arbitrary, CNBC recently published this simple formula to help you figure out if you’re setting aside enough money. In your 20s, aim to save 25 percent of your overall gross pay, including retirement account contributions, matching funds from your company, cash savings or money you have invested elsewhere.

By age 30: Have the equivalent of your annual salary saved. So, if you earn $50,000 a year, aim to have $50,000 in savings when you hit 30. Every five years, increase the number of years of salary you have saved. By age 35, twice; by age 40, three times, etc. until by age 65 you have eight times your annual salary saved.

This timeline is similar to the one recommended by retirement-plan provider Fidelity Investments, which recommends having the equivalent of your salary saved by age 30 and 10 times your final salary in savings if you want to retire by age 67.

However, be sure to avoid risky investments. Thousands of people lose money each year on highly speculative investments and scams. When investing, it is a good idea to consider if you would benefit from professional advice from a regulated independent financial adviser.

You can lower the level of risk you take when you invest by spreading your money across different types of investments. This is called diversification. All investments can perform very well or very badly so make sure that you don’t put all your eggs in one basket. Mutual funds are typically thought of as having less risk than investing in just one or two stocks. Greater diversification means less risk. Ecclesiastes 11:2 says “Make seven or eight portions; you know not what misfortune may come upon the earth.”

We all have a lot of goals for our finances. You may want to buy a car within a year, or you may want to save for a newborn’s college education in 18 years or your retirement in 30 years. All of these goals have different time frames, which means only you can decide whether it’s best to reach your goal by saving or investing. That’s why it’s important to make a plan.

Everybody should be saving AND investing no matter what your income level. If you are only earning a bare minimum, you still need to save a little bit every time that you receive a paycheck. You have to be prepared for that time in the future when an emergency occurs.

If you are earning more than the bare minimum, there should be no question about having an emergency fund, money saved for the things that you want to do in your life and especially for retirement.

And, just because you are focused on savings and investing, remember to be generous. Everything that you have is a blessing from God. As you think about the balance between giving and saving/investing, your attitude should be not how much of your money you are going to give to God. Rather your thoughts should focus on how much of God’s money you need to keep!