“A penny saved is a penny earned” – a fiscal truth that is fundamental basis of good financial management. Yet many people fail to see the importance of developing good saving habits.
Achieving your long-term financial goals depends on two separate, yet complementary skills, namely fiscal and investment discipline. Fiscal discipline means saving or otherwise collecting an appropriate amount of capital to invest. Investment discipline involves building a portfolio and managing risk in order to maximize your investment goals. Investing is hugely reliant of a person’s ability to save – if you want to invest you must first save.
Developing a regular saving pattern early in life is an important step in creating a stable foundation on which you investment goals and future financial need can be built. There are a variety of ways individuals can benefit by being especially cognizant and diligent about saving and investing early in life:
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- A safety net is built. Murphy’s Law holds that “anything that can go wrong will go wrong.” It may not be healthy to have such a pessimistic outlook on life, but when it comes to building a healthy future, the best course of action is to proceed with caution. Recent history is a testament to what can happen, and if there is one lesson to take away from the economic crisis, it is that shocks to the financial system can have a devastating impact on the personal fortunes of anyone and everyone. A safety net can serve as a buffer against unexpected lifestyle changes and cataclysmic events.
- Wealth is created through investing. Over time, the stock market has proved to be one of the greatest ways for individuals to build wealth, but it’s necessary to have savings in order to build wealth through investing. Nearly everyone would like to be financially secure—and investing is one of the best ways to accomplish this goal—but it is saving continually over time that provides the required capital.
- A time advantage is secured. Albert Einstein reportedly referred to compound interest and its ability to help investments grow by reinvesting the proceeds as the most powerful force in the world. Though we can’t be sure he actually said that, he certainly would have been right to: The power of compounding and the time to ride out market swings are what allow younger investors to take either more risk (in hopes of a greater return) or less risk (and still achieve the same goals) than older investors.
- Experience is developed. One doesn’t become a proficient saver or investor overnight. It takes time to build the financial discipline necessary to save when you can, and the same goes for building the analytical skills needed to estimate the value of a security or to distinguish a mispriced asset from one with limited growth prospects. Younger investors have an advantage by starting early and building their skills over the long term.
Though an exhaustive list of the benefits of saving would be almost infinite, after a certain point it’s almost more important to stop thinking and begin putting money away. Saving smart and saving early is a key strategy to reaching your retirement goals.
We’ve been focusing on this topic for the past few days on Inside Investing, and it’s merited. We’ve covered the difficulty in planning for a secure retirement as well as some techniques to help you save automatically. Both of those take a lot of inspiration from one of our recent projects, a globally relevant document that outlines the key steps to take in planning for retirement.
This is a special day, because along with a number of leaders in investor education from around the world are convened in Washington, DC for the IFIE-IOSCO investor education conference. It’s rare that such a fertile opportunity to share ideas with an empowered and ethical global community. If you’d like to follow some of the discussion at the conference, follow the discussion on twitter. We’d be happy to pass on any questions you may have.
This was previously published on Inside Investing at the CFA Institute.
Robert Stammers, CFA, is director of Investor Education at CFA Institute, which includes management of the Inside Investing Blog. Previously, he was the principal for his founded company A2O Consulting where he consulted to aide real estate owners, lenders, and syndicators, develop and analyze structured real estate investments. There, Stammers developed strategy for obtaining debt and preferred equity capital as well as created finance-related marketing materials and research papers for various clients.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.