FP Article 28
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Saving versus
Investing
by Rajen Devadason
I had lived way under my income for years,
saving money.
Charlie Munger
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While
it is wise to save money regularly
and to invest prudently, I thought
you might enjoy reading this short
piece on the difference between
these two fine habits.
The quotation above
from Charlie Munger will probably
mean more if you know this:
Munger is the long-time partner of
Warren Buffett. Buffett himself is
deemed to be the finest investor of
all time, and is in the top-tier of
super-billionaires on our planet.
While not in that league, Munger is
no economic slouch. |
At the time of this writing, late 2007, Munger
was ranked by Forbes as the 239th richest
American with about US$2 billion to his name.
Most people reading this would be happy with
just 1/2000 of that, or US$1 million. Am I
right?
If you fall in that hopeful
category, then I'm here to let you know, in all
humility, that the first skill you need to
develop within yourself is the ability to save
aggressively.
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This is an article on the importance
of saving and investing, and on the
differences between these two fine
habits. I hope
you enjoy reading it. But if it isn't what
you're looking for, you're welcome
to search for something that better meets
your needs. Thank you for allowing
me to serve you.
Rajen Devadason |
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If you're accustomed to roaming
the aisles of well-stocked bookstores, and if
you've made it a habit to read books on personal
finance and financial planning, chances are good
that you believe the first step toward
succeeding financially is saving 10% of what you
earn.
In my day-to-day work as a
financial planner and retirement funding
specialist in sunny Malaysia, I've come to
realise that while 10% is a laudable savings
rate target for beginners, those who are serious
about succeeding financially should save more.
Much more!
That's why I try to encourage my
own clients to make gradual, gentle changes to
their cash flow patterns. My goal is to help
them slowly ratchet up their personal net
savings rate from perhaps as low as one or two
percentage points to as high as 40% to 50%!
Needless to say, my consistent
advice toward this end has not made me overly
popular with certain segments of the hardcore
'plastic therapy' crowd! I don't mind; and
neither should you...
You see, for you to move forward
and truly succeed in the economic realm of life,
you must get serious about spending less than
you earn, and then about saving and investing
the difference!
Long-term financial success is
achieved through that prosaic route.
There is no rocket science
involved in this, because once you get to the
point of spending less than you earn, your cash
flow pattern each month will reflect that of an
accumulator of wealth. The more you accumulate,
the better it will be for you... but only up to
a point.
I discourage the more (shall we
say) inspired of my clients from going beyond a
50% net savings rate. Incidentally, that is
where I hold my own savings rate at. Why do I do
that? Well, to me the idea of setting money
aside, initially for savings and later for wise
investing, is to work toward a bright future
tomorrow.
But ultimately God alone knows
how long we have on this spinning ball called
Earth. Any of us could end up shuffling off this
mortal coil sooner rather than later.
Therefore, it's imperative that
we also learn how to spend money on ourselves
and to enjoy this journey we're on. Life is way
too short, and it should be lived and savoured
and enjoyed. To achieve this end, a healthy
balance between immediate gratification and
delayed gratification, present consumption and
anticipated future consumption should be
achieved.
So, within our context - saving
versus investing - I believe the correct balance
is to spend half of what we make on living the
best possible life we can today and the other
half should be set aside for tomorrow.
Now, when it comes to doing so,
the initial act of saving and investing is the
same:
Money is
channeled out from our regular expense patterns
and shunted to holding tanks or reservoirs.
Up to this point, both saving and
investing are identical. But after that there is
a subtle but important shift between the two
habits:
When we save money, we choose to
reduce our level of consumption and thus
proactively lower our present lifestyle. (For
some interesting, fun quotations on savings,
click here.)
When we invest money, we hope to
do so successfully so that our future level of
consumption will be higher and thus our future
lifestyle will be better.
And that's the core difference
between saving and investing.
If you're tempted to ask which
habit is more important, please allow me to stop
you right now! Asking that is like trying to
figure out which is more important, breathing or
eating, your brain or your heart!
By the same token, both saving
and investing are equally important. However, if
you have not been saving or investing up to this
point of your life, I suggest you begin by
saving first.
That's because it is always safer
- and I think, wiser - to begin investing with
your own money. And obviously you can't have any
money to call your own unless you first channel
it out from your regular consumption pattern, in
other words, save it.
If you would like to continue
your personal in-depth study of aspects of
personal finance that might best meet your needs
right now, please help yourself to these 3 free
articles, which address these vital issues:
What is Money?
How to Start Saving Money
What is a Cash Flow
Statement?
Take your time reading and
rereading this article, and then the 3 others
I've pointed you to. Carry out your own
additional reading, researching, thinking and
planning. Then begin to work out ways in which
you can start getting serious about saving and
investing.
(If your goal is to one day become seriously
successful, you may choose to buy and read my
ebook on goal-setting entitled
UNLEASHED!)
© Rajen Devadason
