A person with savings has more options in life. He is free to follow his choices and make his own decisions. He is free to worry about other important things in life. Investing improves your chance to increase your wealth. Investment improves your future financial stability while savings secure your present financial situation. Here are a few steps you can take in order for you to achieve financial freedom.
In order for you to spare some cash for your savings and investment you either must spend less than what you earn or earn more from other sources of income. For starters, you can budget your expenses around eighty percent of your current income and place twenty percent in savings. If it is hard for you to immediately adjust using this budget, start at a smaller portion, and continually adjust the portion until you are comfortable with the amount you put aside for your savings.
The next step is to save up to 6 months worth your current income. This will serve as your emergency fund. This fund should only be used in case you lose your job, incur major expenses due to sickness or other unfortunate events.
After your savings reach the amount you earn in 6 months, you can start looking for where you can place your excess savings. If you are the breadwinner of the family and they depend on you financially, you might want to think about investing in life insurance first. If you currently have no dependent, you can consider investing it in stocks, bonds, mutual funds, trust funds, or other investment vehicles.
The simplest way to invest in highly volatile investment instruments such as stocks and equity funds is to have a long investment period and to invest regularly. This method is called cost averaging, which is discussed in detail in my previous post Equity investment strategies - Cost Averaging. The fluctuations of the market won't affect your investment if your investment horizon is more than five years. It doesn't matter when the market goes up or down.
For people who are more inclined with investments with moderate risk, Bond funds or Retail Treasury Bonds offer lesser risk but at a lesser return. If you prefer investments that are secure, Long term time deposits offer higher returns compared to an ordinary savings account. These tax-exempt time deposits are tied up for 5 years, offer higher than the usual interest rates. These investments are secured by the PDIC up to Php500,000.00.
It doesn't matter whatever instrument you decide to invest in. As long as you continue to save and invest, you will continue to grow your wealth and eventually achieve financial freedom. The earlier you start the easier it will be for you to attain wealth. Savings will provide you access cash in times of uncertainties while Investing will let your money work for you, increasing your wealth exponentially.
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