01. Why to invest before you have to save
It wasn’t until inflation started to rise in late 2021, many of us didn’t realize that having money saved could be a problem. Not that it’s wrong to save. The problem was in the low yield offered – and continues to offer – to keep the money in a checking account. That is why many, like Matías, believed that in 2022 the time had come to invest.
In this post we will explain that we will confirm that it is always a good time to invest. But if you choose to start now, it’s critical to have some clear ideas. The first of all is that in order to invest it is necessary to have saved before. And it’s not worth any amount.
The financial house
Just as we cannot start the house by the roof, we cannot aspire to become the Wolf of Wall Street overnight. Before we even define our goals – beyond making money – it is important to have our finances in order.
Thus, the first rule is to have an emergency fund, which would be the basis of our financial house. The idea is to have a mattress that allows us to face unforeseen events, because you never know when they will arise. The Bank of Spain considers that this fund must have, at least, the money equivalent to three months of expenses. Much better if there are six. Actually, it depends on the circumstances: it is not the same if you are a single person than if you have a child or a family member in your care, for example.
It is very important that the money is liquid. That is, that it is immediately available: a good place is a bank account at sight. You have to remember that that fund can only be used for what it is. In other words, under normal circumstances it should never be spent. And, if it is spent, our priority will always be to replenish it.
The next floor of our house is made up of recurring income: in most cases, payroll. If you are lucky enough to have a rented apartment or some other asset that generates periodic rentals, they would also enter here.
Further up, already overlooking the street, would be our short-term savings. That money we plan to spend on holidays, Christmas gifts… Or replace that mobile phone with the screen so cracked that it looks like a kaleidoscope.
According to the U.S. Centers for Disease Control and Prevention (CDC), the odds of lightning strikes are 1 in 500,000. Surely it will not touch us, but we do not stop sleeping with a roof over our heads. In our financial house, that roof is insurance, which protects us and our families from those things we cannot fight.
Out of debt
And we would have the fireplace. It’s not that we’re not sensitive to greenhouse gas emissions: it’s just a simile. In addition, the smoke that should come out of our house is none other than the result of burning debt, something as important as the emergency fund. You may think that paying for the iPhone in installments is a great idea – not necessarily bad. But it is an even better idea to reduce, if we are in a position to do so, our loans. Especially those that are short-term, which usually entail high interests. As we will discover in another post, an interest, even if it is small, becomes a very large sum over time. When we talk about profitability, it’s great; When it comes to debt, not so much.
But don’t despair. This, which is a consequence of compound interest, is also the basis of all the good that investment implies. And that is why it is interesting to start investing now, even with very little money, and make regular contributions with a view to the long term. Remember Fry? In an episode of Futurama it occurs to him to visit his bank 1,000 years after the last time. In its day, it only had 93 cents, but after a millennium renting at 2.25%, those 93 cents became 4,300 million dollars. Who caught them…
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