From savings to investment - Part 1
It's not just saving, it's putting it into production.
Do not save what is left after spending; instead spend what is left after saving.
Warren Buffett
In the last post of La Forja we talked about why it was good to save and some not so mainstream perspectives on how to do it:
Having savings is essential in order not to be dependent, to be able to say no, to have freedom.
Saving is good for you and for others.
Everyone can save:
There is not much that is not spent nor little that is not enough.
Galician saying.
Save time, not money
Define your materiality and be disciplined with spending: you can spend without much consideration what is below your materiality and reserve well analyzed spending decisions for what exceeds it.
The least discussed in the world of savings is the generation of new income.
So much for saving, striving to set aside a little of what you earn each month to accumulate extra money and also worrying about how you could generate more money as a way to increase your ability to save.
I leave it ready for another installment of La Forja on how money is a state of mind and how human cognitive biases affect us.
Saving is so difficult for some not because of the reality of their financial situation, but because there is a problem of two kinds underneath:
Values and principles, leading to habits and modes of behavior.
Cognitive biases and capacity for self-control.
Things like instant gratification and being unable to delay the satisfaction of a present desire for greater satisfaction in the future underlie the problem many encounters when trying to save.
It's not just a financial literacy problem, but something deeper, in my opinion.
I'll leave the headline and park it to get into it in a future installment.
We assume that you are saving, that you have matched your standard of living to your income, and that you are on the path to generating surplus money month after month, so the pot is filling up.
From the mattress to the bank
When you have money saved you have to keep it somewhere, this is silly.
There is the mattress, putting the bills under the mattress.
It is not a bad option if you live in the last century or if you think there may be a bank run.
That does not usually happen.
Until it happens, see Greece in 2015. See Argentina in the Champions League of the bank runs every 10 or 15 years.
It's already less laughable the mattress, isn't it?.....
There is a Deposit Guarantee Fund in Europe that, on paper, guarantees savings in the bank up to 100K €, but paper is paper and we have seen all kinds of papers blow up when things get really rough, so you can trust them or not.
Even so, and with due precautions taken, instead of the mattress, where it is more susceptible to deterioration or theft, savings should be kept in the bank.
I recommend that you put your savings in a bank or in several banks, ideally, but I bring this up so that you laugh less at your uncle Perry, the one with the money under the mattress, and understand that what you think is safe, simply isn't.
From there, you take it, measure the risk, diversify where you put the money and go on with your life.
Several banks is not bad for risk diversification.
What do you have to keep in the bank?
Checking accounts and demand deposits, that is: liquid money that you can withdraw whenever you want.
Liquid money.
What for?
To be able to count on it instantly in case of need, as we discussed in the article on savings.
This gives you freedom and the power to say no, while being able to deal with unforeseen events.
That's why you don't want to keep this money in less liquid assets that will cost you more to convert into pure money, but you want it in money so that you have assured liquidity.
How much should you have in the bank?
As long as you have decided you want to get yourself to have options and be independent.
In the previous article I recommended a threshold between 12 and 24 months.
Each person, circumstances and phase of life will influence how that time will adjust.
We are talking about time, as you will remember, not amount of money, because 10K € can mean five months of time with zero income and pulling from savings for one person and one month for another.
The important thing was not the amount, but the time it buys from your current lifestyle (or your subsistence lifestyle, which is another option to consider).
- Understood.
And from that amount which means the time I want to have purchased freedom, what do I do with the surplus?
I'm good at saving and I keep generating surplus with the tips from the last La Forja.
You've got plenty to spare then, don't you?
OK.
Then come on.
With the surplus I recommend that you put the money to produce more money, that is, that you invest.
From bank to investment
When you have the money in the bank it produces little or no profit for you.
Let's call it nothing.
But that's not why you have it there, but because of what was explained in the previous point: to have liquidity.
What happens with this is that common sense leads you to understand that it has a limit: do you want 10 years of time bought in the form of savings in the bank?
Well... you can, and in fact some people do, but my opinion is that this is a very inefficient use of your money.
Above that threshold of time that you decide: 12, 18 or 24 months, which I recommend as a maximum, it would be a good idea to put the money to produce more money in the form of investment.
I don't want to talk about this beyond my capabilities, so I will stay in a simple zone of basic financial hygiene and I recommend that if you find yourself in this situation already or if you find yourself in the future, you get advice from an expert in financial advice.
This is radically important so that expert can understand your risk profile, the context of your life, income capacity and expectations about the money you invest, etc.
A good investment advisor can even tell you to go home and not invest because you are not ready for it.
I was talking to someone the other day and he was telling me that because of inflation you should already invest, to prevent your saved money from being eaten up by inflation.
I answered him two things:
If you are lucky enough (which not everyone is) to live in countries where there is no high inflation or hyperinflation, you may find year-on-year inflation rates close to 0% on average in the last decade, as in Spain, so inflation has not been a real problem.
Even if inflation was a real problem that moved in a decent environment of 3%, I repeated the phrase that a financial advisor with a lot of war on him once told me:
It is not the same thing to know that you are losing 3% a year with inflation than to wake up one day and have lost 25% of your investments due to a market crash.
If you are not willing to assume the second, go home and put your money in the mattress (or in the bank) and assume inflation.
To assume the second, you have to be at a different level of maturity.
I sign below that advice, so I simply transfer it to you without adding anything.
- Okay.
I don't do anything with my surplus time until I talk it over and work it through with an expert financial advisor.
But give me something, the basics to get an idea of what this is all about.
OK.
This goes that you should now use to invest only the money you are able to sleep on if you lose it the next day.
That radical? Lose everything?
As radical as that.
The chances of losing everything if it is well invested are low, but they are not zero, so you should really use this maxim: invest only what you have “left over” from your time cushion and, in addition, you are able to assume that you can lose it.
Otherwise, don't invest.
- OK.
Done. When I can take that on, I will use that money to invest.
But tell me: how much, how and in what
This article is getting long, so we'll leave that for the next one, but let's keep talking about basic financial hygiene and not as an expert, because I'm not one. However, I pretend it can help you.
Let's write this down:
How much to invest
How to invest
What to invest in
Why, how and in what to diversify
From investment to capitalization: not all capitalization is in real or financial assets.
We are talking too much about money and I don't want that to monopolize this topic because there is so much more to get out of it.
If money is your hope for independence, you will never have it.
The only real security that a man can have in this world is a reserve of knowledge, experience and ability.
Henry Ford.
I leave you this:
Which would you rather be, the dumb nephew who inherits significant and profitable wealth from his uncle today in the form of garages that are rented out or someone who doesn't have much today, for whatever circumstances, but is able to generate potent free cash flows?
Not everything is money in the world of capitalization.
Not all capital is financial.
The dark horse is non-financial capitalization.
José Fortes - La Forja.
josefortes@substack.com
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