When should you stop saving and start investing

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Everything in life has its moment, also your personal finances. There is a time when saving should be your priority and another when you should focus on investing. Your age and the path you have traveled so far are the key to knowing when to take the leap and stop saving to start investing.

Before investing, prepare an inexpensive mattress

There are few golden rules in finance, but this is one of them. It can be expressed in different ways, from the classic “do not invest money you need” to “invest only what you can afford to lose.” In any case, its practical translation is very simple: Before investing, build your contingency mattress (or at least a part of it).

That inexpensive mattress is money that will help you cover unexpected expenses without having to resort to loans or withdraw investments once you start doing it. It’s your safety net if everything goes wrong; a capital that should always be available and safe, without assuming any risk.

How much is a good mattress saved?

The most repeated recommendation is that you build a mattress with at least three to six months of your fixed expenses. From there, the amount will depend on the level of security you need and your life goals.

There are those who have enough with three months and those who prefer to have a year of capital saved. Anyway, once you have those three months of mattress, you could change your savings strategy to start making way for investment.

Savings and investment: are they compatible at the same time?

Savings and investment are not mutually exclusive, you can invest while saving and vice versa. It all depends on your starting point and your ability to save. In other words, how much money you have saved and how much you can save each month.

If you already have three months of your fixed expenses saved, you can start setting aside an amount of your monthly savings to invest while you continue to allocate the rest to grow your financial cushion, at least until it reaches the level you are looking for.

By exampleIf you are able to save € 250 per month and already have a three-month economic mattress, you can save € 150 and invest the rest until you collect the amount you have decided you want as a contingency fund.

How much of your money should you invest? The reality is that there is no concrete measure. The answer depends mostly on your priorities and what allows you to be calmer. Is it more important to have a good emergency mattress or to get the most for your money? Answer that question and you will know what to do.

Roadmap to your first € 100,000
Nothing as an example so that you understand how to articulate your own plan. The goal in this case is to collect your first € 100,000.

These are the steps you should follow and how long it will take to achieve it starting from a savings of € 250 per month and thinking that you need to collect € 8,000 as an emergency mattress (six months of fixed expenses).

Step 1: 100% Savings
You will start by saving 100% of your savings capacity for 16 months until you have 50% of your contingency mattress, which is equivalent to 3 months of fixed expenses or € 4000.

  • Time of the first stage: 16 months.
  • Accumulated savings: € 4000.
Step 2: Savings and investment at 50%
You will continue to allocate 50% of your savings capacity to save and the remaining half to invest until you reach your goal of having your financial cushion.

Only the 50% destined for savings will be added to the financial cushion. The rest of the capital will be invested in the long term to achieve that goal of having your first € 100,000. For the calculations we are going to assume that you are able to obtain a profitability of 4% per year each year.

  • Second stage time: 32 months.
  • Total time: 48 months (4 years).
  • Accumulated savings: € 14,624.48 (€ 8,000 emergency fund + € 6,624.48 in investment).
Step 3: 100% investment
With the full financial cushion, you will invest 100% of your savings capacity in the long term under the same conditions. At the end of 20 years, you will have added your first € 100,000.

  • Second stage time: 240 months (20 years).
  • Total time: 288 months (24 years).
  • Accumulated savings: € 111,291.02 (€ 8,000 emergency fund + € 103,291.02 in investment).

To speed up the pace you can increase your ability to save or try to achieve a higher profitability.

How to start investing once I have savings?

There are more than one way to start investing. A very common mistake is to think that to invest you need a lot of starting money. Nothing is further from reality. Of course, you can wait to raise € 10,000 to invest as before, but it is no longer necessary.

Today there are products that allow you to invest small amounts of money each month. They are ideal for small savers who have not raised a large capital, but who do have the capacity to save monthly and are clear that the sooner they start, the better.

The Naranja + portfolios are an example of this type of investment. In addition, they allow you to do it automatically and easily every month, without having to worry about anything. Of course, you can also hope to save that € 10,000 and still face the dilemma of whether it is better to invest it all at once or with regular contributions.

What if you have to use the emergency mattress?

The contingency fund is there to use, but once you do it, it is essential that you replace the money you have withdrawn. You can do this by increasing the money you spend on savings and reducing investment; or recovering part of the money you have invested if it is a good time to do so, although this is always less recommended. Again, the decision will depend on how important the emergency fund is to you and, above all, how much money is left.

As a summary, it is better to just save and not invest when you don’t have an emergency mattress yet. On the contrary, it is better to stop saving and only invest when that contingency mattress is already the size you want. That is the signal that you should stop saving and start investing.

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Invest the amount you want. With less expenses and commissions.

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En Naranja I The 52-week challenge: how to save € 1,400 in one year
Image I Warren Wong

Savings, Economic concepts, Investments

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