Before taking the leap into investments, it's crucial to have a solid foundation of liquid savings. As we discussed in a previous post, the first step towards saving is evaluating your potential income and meticulously analyzing and controlling your expenses. The remaining cash flow serves as the groundwork for future investments.
Building up your liquid savings is crucial to financial security and independence: start saving and investing at your earliest convenience.
These savings can act as a safety net during times of financial hardship or unexpected emergencies, preventing you from falling into debt or taking out loans with unfavorable terms. Moreover, having a substantial amount of liquid savings can provide you with a sense of financial stability, enabling you to take calculated risks with your investments without the fear of losing your hard-earned money.
How much can you save in a month?
USD 0-500
USD 500-1000
More than USD 1000
To start building up your liquid savings, it's important to prioritize setting aside a portion of your income each month. A good rule of thumb is to aim for a minimum of three to six months' worth of living expenses as a cushion. You can do this by automating your savings, setting up direct deposits into a high-yield savings account, or by setting up a separate account solely dedicated to your emergency fund.
By taking the time to build up your liquid savings, you're taking an important step towards securing your financial future. It may take time and discipline, but the rewards of having a solid financial foundation are well worth the effort.
Saving money may seem like a daunting task, but even setting aside a small portion of your funds can make a big difference.
As children, many of us experienced the joy of saving up our pocket money to purchase something we desired. We knew how much we were "earning" and how much we needed to reach our goal. The same principles apply to saving as an adult. Every little bit counts towards reaching your financial goals, whether it's for a dream vacation or a rainy day fund. So start today, even with a small amount, and watch your savings grow.
Saving for accumulation or self-care works in a similar way. But their purpose is different from our childhood savings: we don't save to buy something in a few months' time. We want to build up a long-term reserve to prepare for times when our current income, for whatever reason, doesn't cover our regular expenses.
There are many forms and degrees of saving. Smaller amounts are put into a "bushel" (kept in cash), larger savings are put into various bank accounts, crypto wallets, savings accounts. These amounts are immediately accessible, liquid reserves.
Over time, these amounts become too large to simply keep in cash. We start to become concerned that while prices are rising, our money is not keeping the value and its purchasing power is unfortunately diminishing, due to a phenomenon called inflation.
On the one hand, we are happy about this situation, because we have saved well, but on the other hand, we need to do something to preserve the real value of our money. And we have now arrived at the world of financial investments, where we will try to give you some practical advice below.
Once you have some savings, it is important to determine for yourself for how long you can live without the amount that you put aside.
If you are likely to have major expenses, such as paying off debts, paying school fees or making large purchases, you should not turn your money into an investment that could lead to a loss in the short term. This could be shares, mutual funds, crypto currencies, NFTs and other assets.
Investing can be a risky venture, especially if we need to access our funds in the near future. However, if we have a longer time horizon of 3-5 years, we can afford to be more daring and invest in higher-risk investments with greater potential for volatility. Of course, we must base our decisions on thorough research and analysis of available information to ensure that we are confident in the investment's positive medium-term trend. Nevertheless, unforeseen events and factors can still impact our expectations, as seen during the 2008 credit crisis or the market correction triggered by the Covid-19 pandemic in 2020.
It is important to be aware of the existence of (unpredictable) risks in the markets.
When it comes to investing, there are various risks to consider. One such risk is the potential for a market-wide downturn caused by unforeseen global events, such as a pandemic. Additionally, political risks, like war, and currency risks, like those seen in Argentina, can have a significant impact on international investments. Furthermore, specific companies may face business risks, such as mergers or unfavorable financial reports, which can affect their securities. These factors will be discussed in more detail in a future blog post.
We should be aware that the risks mentioned above are constantly present, sometimes weaker, sometimes stronger in the capital markets. Generally speaking, we expect higher returns in exchange for higher risk. Long-term measures show that stronger-risk equities in the US have delivered annual returns of over 8-10% over the long term, while corporate bonds have returned 5-6% per year, Treasury bonds (4-5% per year) and cash/cash equivalents such as short-term Treasury bills (2-3% per year).
However, the good news is that the impact of risks on investment performance can be mitigated by appropriate asset allocation and diversification. Other risk mitigation measures could include hedging our foreign currency investments with forward contracts or even taking out insurance. Possible risk management approaches will be discussed in the "advanced" section of this blog in the upcoming weeks. However, we think it is important to mention here that with proper care and discipline, you can multiply your original investment amount in the long run. Stay consistent, prepared and disciplined.
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