Saving wisely is an important component of your financial stewardship. Last week, I wrote several posts about saving because it was America Saves Week:
Along with all the great advice in those articles, it is important not to get so caught up with the saving approaches that you forget to balance it with investing.
In my book, The Wealth Cycle, I call this concept SaVesting - saving and investing at the same time.
I came up with the phrase 'SaVesting' because I notice a trend in a lot of personal finance teaching regarding how you sequence your saving and investment goals.
Saving wisely is often characterized as delaying your involvement with investment vehicles until you have a certain amount of money in savings - usually three to six months' worth of living expenses.
In this personal finance strategy, all of your focus initially should be on getting out of debt and saving up this emergency fund because the debt is equivalent to 'negative investing' and would negate any gains you have in the market.
The reason I disagree with this approach is that putting all your 'eggs' in the savings 'bucket' makes you lose the power of time in building your wealth. Especially if you have to climb out of a huge hole of debt. If it takes you five years to pay off your debt, at the end of those years, you will be at zero - and have no way to get back those years that you spent without investing.
Whereas, if your debt payment plan takes slightly longer, but you put money away in a simple investment vehicle like a mutual fund, you take advantage of compound interest over the five years and when your debt is paid off, you already have momentum towards your wealth-building machine.
Winning in personal finance requires the ability to focus, while simultaneously 'juggling' more than one thing at a time. Saving wisely means doing so in conjunction with your debt elimination plan and your investment plan.
Even if you may not be able to invest much initially. The order of priority in this three-point approach differs depending on your situation - here are two examples: If you don't have an emergency fund:
If you have an emergency fund of at least $1,000, but still have some debt to pay off:
As you can see from the examples, there is no 'one-size-fits-all' but in each case, you are multi-tasking across your saving, debt elimination, and investment priorities.