Saving vs Investing

Yes, inflation is the pitfall of saving without investing. But even when you’re investing you still need to save… and here’s why:

The reason you can’t have all of your money invested in the stock market is because of… “emergencies.” Life is full of random expenses popping up at the most inconvenient times. Think about it… Your car breaks down, your roof has a leak, you need a medical procedure, or even worse, you lose your job. The point is, something is always coming up.

While saving without investing will not lead to growing wealth, having an emergency fund saved up is critical. When random expenses pop up in our lives, and they always do, will you be ready?

If you don’t have an emergency fund saved up, you will be forced to take out loans or take on high-interest credit card debt just to keep yourself afloat. Even worse, if you don’t have an emergency fund saved up, and all your money is invested in the stock market, you will be forced to sell your stocks in order to pay for emergencies.

You don’t plan to be in the hospital, you don’t plan for stuff to break down, and you don’t plan to get laid off from your job. But these things do happen, and you can plan for them with an emergency fund.

Most financial experts recommend having a long term goal of saving enough to cover 3 to 6 months worth of expenses.

Saving up 3 to 6 months worth of expenses can seem daunting at first. And that’s okay, it’s completely unrealistic for anyone to save up their entire emergency fund overnight.

And it’s also unrealistic to wait until you have saved up 3 to 6 months worth of expenses before you can start investing. That could take years, and by putting off your investing for that long, you will be missing out on too much potential stock market return.

So, to make things easier, start by setting a more achievable goal of saving a thousand dollars. Saving a thousand dollars of cash in a savings account is a really good starting point for building your emergency fund. Because, when you think about it, most random expenses that pop up should be more than covered by a thousand dollars.

Over the long term, as you contribute to your investment account, you can also contribute a little each time to your emergency fund as well. Over time, you will fully fund your 3 to 6 month of expenses emergency fund. Once you’ve reached this point, then you can fully focus on investing even more into the stock market.

Your emergency fund should be stored in a separate account all on it’s own, so you don’t get tempted to spend it on non-emergency purchases. You can keep your emergency fund in a standard bank savings account, an online high-interest savings account, or even a separate checking account.

Beneath this video I’ll be sure to link some of my recommendations for where to open and store your emergency fund.

But most importantly, your emergency fund is NOT money that you invest. It is not money that you put in stocks or in bonds. You don't take this money and buy a new toy. It's simply a liquid cash account that you can access at any time in case an emergency pops up.

Now, you may be wondering, why can’t I invest my emergency fund? The bank pays terrible interest rates and I could get a much better return from investing that money in the stock market, right?

Well, there is one reason, and one reason only. And that reason is price movement. Just as the stock market tends to move up and down, so do the prices of the stocks you invest in.

Now, as we learned earlier, the stock market has a history of increasing in value over the long term. But in the short term, stock prices are often fluctuating both up and down. At some point during your investing in the stock market, you should expect to see significant dips just as you could expect to see significant gains.

Again, this is not a bad thing though, when you’re investing for the long term. Because, these times of stock market dips can actually be great buying opportunities to pick up quality stocks at bargain prices. But, we’ll get more into that later in the course.

The main thing you need to understand right now, is that holding on to stocks that have dipped in the short term, is oftentimes a viable strategy for coming out on top in the end. This is because the stock market has a way of correcting itself over longer periods of time.

But, back to your emergency fund, what happens when it is invested in the stock market? What happens when the stock market dips AND an emergency expense pops up at the same time? Well, in this scenario, you may have no choice but to sell your stocks, for a loss.

Again, you didn't plan to get laid off from your job, you didn’t plan for your car to break. But now you’ve got to replace your engine, and you have to sell your stocks while the market is down.

Maybe you're down 25 or 30%, and guess what, you don't have the choice of waiting for your fallen stocks to recover. Instead, you have to sell them because you need that money NOW. And that is why you do not invest your emergency fund.

So, I want to give you guys a quick example with Microsoft stock. And this, is one of the more established companies you can own. It's called a blue chip stock. Let’s say you bought some Microsoft stock on February 18. You had a hunch and you bought this stock at an all time high of $187 per share.

Well, very shortly after, something catastrophic happened. You may remember the Coronavirus pandemic. Yup, no one saw this coming, but these unforeseen  things happen, and they have effects on the stock market. And as you can see, on March 23, Microsoft stock dipped down to $135 per share. Yes, a 28% drop in your initial investment!

So, let's go ahead and say you initially had a thousand dollar emergency fund. You said, I’m going to put my emergency fund in Microsoft stock and you ended up buying 5 shares of Microsoft stock at $187 a share.

And then, right as the market dips, you also got laid off and you needed to access your cash. So, you ended up selling your 5 shares of Microsoft stock at the very bottom of the stock market dip, for $135 a share.

Well, you just recognized a 28% loss and your $1,000 investment is now a little less than 750 bucks. But, because you needed that money for an emergency, you had no choice. You had to sell.

But look what would have happened if you had simply held on to your shares of Microsoft stock, and allowed the stock market to do what it does, which is to naturally correct itself with time.

As you can see, Microsoft stock went from its low of $135 a share back to $187 per share in a very short period of time. And even better, shortly after that, the price of Microsoft stock continued going up to new all time highs, reaching above $200 per share.

This all took place a little over the course of 4 months. If you would have sold because you needed the money, you would have taken a loss of 28%. But, If you would have just held on to the stock, you would have made a pretty good return, even if you bought it at its original high of $187 per share.

Again, this is why you don’t invest your emergency fund. You never want to be forced to sell your stocks at a loss. Because, as long as you're investing in quality companies, if you can just wait it out, your stocks will recover and continue rising higher.

Once you have opened up and started saving into your emergency fund, you’ll feel a lot less worry about any short term stock market dips.

Speaking of the stock market, in the next article, we’re going to break down what the stock market is, how it works, and why it exists. We’ll also explore the pros and cons of the 5 different investment assets you’ll need to know about when you begin investing in the stock market.