“A penny saved is a penny earned” is a truth that is part of the 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: fiscal discipline and investment discipline. Fiscal discipline means saving or otherwise gathering capital to invest, whereas investment discipline involves building a portfolio and managing risk in order to reach your investment goals.
It is important to remember that to be a successful investor, you first have to be a successful saver. The development of a regular saving pattern early in life is an important step in creating a stable foundation. This habit can help you meet your goals. Developing a savings discipline will allow you the opportunity to do the following:
- Build a safety net. 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. 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.
- Create wealth through investing. Over time, the stock market has proven to be one of the best ways for individuals to build wealth, but you need savings to take advantage of it. Nearly everyone would like to be financially secure, and investing is one of the best ways to accomplish that goal—but you need capital in order for it to work. Saving is the best way to get that capital.
- Secure a time advantage. Albert Einstein reportedly referred to compound interest and its ability to help investments grow as the most powerful force in the world. Though we cannot 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.
- Develop experience. You will not 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. The earlier you start, the better you will get.
Though an exhaustive list of the benefits of saving would be almost infinite, after a certain point it is almost more important to stop thinking and begin putting money away. Saving smart and saving early is critical to reaching your retirement goals.
We have been focusing on this topic for the past few days on Inside Investing, and it is 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 topics were inspired by one of our recent projects, a globally relevant document that outlines the key steps to take in planning for retirement.