As we touch on the topic of saving and investing today, I want to highlight a few big picture points from my book Master Your Money.
First of all, it is important to understand the definition of an investment. An investment is, “something that is purchased with the intent to resell at a higher price…(and that) was purchased to preserve or increase its value…and…to provide some amount of economic return or yield.” (pp. 183-184) We tend to confuse our long-term purchases (such as a car or a diamond ring or furniture) with our investments. Only if you intend for an asset to grow in value and then intend to sell it when it has, is that asset an investment.
Secondly, it is wise to have an investment strategy, not to just make investment decisions. There are basically three time periods in a person’s investment life: the accumulation phase, the preservation phase, and the distribution phase. Moving through those three phases with intentionality depends on two things: knowing your long-term goals for your life (and therefore your money), and being aware of your purpose (accumulation or preservation) with a particular investment. Beginning your investment strategy by setting long-term goals and then by identifying where you are in relationship to meeting those goals is critical for making wise investment choices.
Thirdly, any saving or investing pre-supposes a cash flow margin. In simpler terms, if you are not spending less than you are making, you will never accomplish saving or investing. So, if you find that you have no financial margin, your first step is to budget differently so that you can create some. For many people, just making a budget and being aware of where money is going causes them to spend less. For others, lifestyle demands truly do outstrip income. In those cases, decisions must be made about changes in lifestyle before cash flow margin (or savings) can happen.
Finally, I have always recommended something that I call the “Sequential Accumulation Strategy” to help people decide where their next dollar should go in the scheme of saving and investing. Step one is to eliminate consumer debt. Step two is to set aside between three and six months’ living expenses in an interest-bearing money market fund, account. Step three is to save in an interest-bearing account for major purchases (such as cars or down payments). Step four is to accumulate to meet long-term goals (such as college educations or retirement, etc.). Step five, and the final step, is to use investment dollars to complete long-term goals.
While this is a brief overview, it does illustrate that you can both have a strategy and also have an attainable plan to accomplish that strategy. Money management is not magic, nor does it have to be a highly complex subject. Simply knowing where you are and deciding where you are going will help you tremendously as you make financial decisions!
If you want to know more about these topics, see Chapter 12 in Master Your Money.
May God’s peace encourage you as you pursue financial freedom and depend on His Truth.