Whether you are trying to get out of debt, or are looking to build up some savings, there are some quite universal dos and don’ts that everyone should use in every stage of life.
Keeping your cost of living lower, as opposed to higher, is always a good thing. The difficult part is that most people fail miserably at this without even realizing it because we live in a culture that encourages higher living costs. This dynamic causes problems for people at all levels of income living at every stage of life. Once you have built up some savings, deciding what to invest them in and how to do this correctly is another area where most people struggle.
It all adds up
Smartphones have become one of those things that everyone needs. Sadly, they often destroy people’s ability to build savings. Say you sign on to a two-year contract that offers the latest device for $70 per month, with $300 in upfront fees. A bring-your-own device plan might cost $35 per month and the only up front cost, other than buying the device, is $10 for a sim card. Today, there are many smartphones that will do all the basic functions for $200. The bring-your-own device plan would save you $35 per month. Doing this for two years would generate $840 in savings. Another bad one is spending on daily coffee or lunch. Suppose you spend $6 on a wrap and $3 on a coffee everyday at work. Doing this every day 5 days a week adds up to over $2,000 per year.
What should I do with my savings?
Once you’ve developed the good habits that generate savings, where should you invest? Most financial planners that work at your bank will do a survey of your risk tolerance. Most people who want to preserve what they have saved will favour an investment with a lower rate of return because the value of it will not fluctuate year over year.
When making these decisions, always consider the time horizons for your investments. If you are planning to use your funds for a big purchase in five years, low risk with low return is best. However, if you are building up your retirement savings over 30 years, higher risk can be better. Suppose the risky investment generates a return of 7% and the safer one generates 5%. You could use the safer 5% option for your retirement savings because there is always the risk that you might not see 7% if the market is bad. However, because you are not drawing on the retirement savings for decades, the year-to-year fluctuations in the market are irrelevant – all that matters is the average rate of return in the long run, which is highest in the risky fund at 7%. Many financial planners will take retirement savings out of the risky fund if the person plans to retire within the next five years, because this is now a short run time horizon. Wherever you are in your journey toward financial well-being, good spending habits and long run investment planning is always a good thing.