Save a Little More. Invest a Little Less
Save more and Invest less is contrary to the usual advice. With most savings accounts offering less that 1% interest and inflation in the UK hovering around 2.5%. Time out the market in theory is dwindling the buying power of your savings. But hear me out.
I believe the benefits of savings are greater than just their interest rate. They are also a safety net, a provider of great freedom, and a great opportunity.
The Opportunity
For the past six months financial commentary, be that Medium, Reddit, or Twitter has focused on the impending crash, arguing that valuations are through the roof and that these all time highs have to end. Move into real estate and the picture is much the same, sky high prices fuelled by low borrowing rates.
There is therefore an opportunity for those willing to wait for that impending crash to get a bargain. Some will argues that this ignores the adage “Time in the market is better than timing the market” and the stats don’t lie timing the market and possibly missing the markets best performing days would be a costly mistake.
However the flip side of this is also true. If an investor mangage to miss some of the markets worst days they can significantly improve their returns. Some market speculation for the active investor could therfore be a worthwhile endeavour.
Personally i continue to invest the same amount into the market each month but have funds set aside for a future opportunity. In the mean time though i have benefited from the additional funds in ways i had not previously considered.
The Safety Net
The safety net of rainy day fund as it is sometimes know is simply savings that are instantly accessible. The advice for the size of a rainy fund differs depending on the source and is linked to an individuals own risk appetite and personal circumstances. On the low end is the UK’s Money Advice Service who suggest three month minimum rainy day fund, on the high end are commentors such as Mark Cuban who frequently suggest a fund to cover 9–12 months of expenses.
All agree though the larger the rainy day fund the more secure you are and the less likely investments need to be sold risking a possible financial penalty or loss. As a minimum though i think the rainy day fund should be enough to cover a period of unemployment as well as any number of unexpected expenses.
The Freedom Creator
Easy access to a siginifcant portion of liquid cash gives you a great number of freedoms. For me freedom from financial worry has improved my wellbeing significantly during the pandemic. Being sound in the knowledge i could afford to continue my current lifestyle if i lost my job or had to take any time out of the labour market provided me great relief during what was a very uncertain 18 months.
For others it provides the freedom to fund a change in career allowing those not fufilled in their current roles to side step into new waters. Their savings providing a safety net that can absorb any change in income over the medium term. It also allows those wanting to explore new avenues the means to setup a side hustle, in which to explore other skill avenues and the opportunity to make additional income sources.
At the end of the day nobody knows what the future holds and everyone prepares for it in different ways. But maybe before we load up the brokerage account we should stop and think about our other options.
