Question
Between saving for an emergency fund or investing, which one should I begin with?
Answer
Before deciding whether to start saving for an emergency fund or investing, it is important to understand the purpose of each of them. An emergency fund serves as a safety net, ensuring you have money readily available for unexpected situations such as medical emergencies, unexpected car repairs, or a sudden job loss. Generally, it is recommended to save at least 3 to 6 months’ worth of living expenses as your emergency fund. This can be kept in a savings account for easy access when needed.
Investing, on the other hand, involves putting your money into financial assets like stocks, bonds, or mutual funds to generate returns over time. It is a crucial approach to managing your finances because it can help you grow your wealth and achieve your financial goals. Although investing is a great way to grow wealth, it comes with the risk of market volatility.
It is advisable to start with building an emergency fund before you begin your investment journey. The emergency fund would act as a buffer, protecting you from unforeseen financial burdens. Once you have a solid emergency fund in place, you can confidently begin investing, knowing that your basic financial safety is secured. It is best to keep your emergency fund in a high-yield saving account. You can do this with us on Ladda, a fintech app that helps you save with high returns.
Question
We get encouraged to invest a lot. Is investing not risky?
Answer
Every investment, whether it is in stocks, real estate, or bonds, involves some degree of risk, as market conditions fluctuate on a daily basis. However, risk and reward are closely linked. It is a general rule that the higher the potential reward, the greater the risk you may face. That being said, there are ways to manage these risks. For instance, you can diversify your investment portfolio, that is, spreading your investments across different asset types. This would help you reduce the impact of poor performance in any single investment.
Moreover, being aware of your risk appetite is important. It is crucial to assess how much risk you are comfortable with taking based on your financial goals, age, and time horizon. If you are young and still have a longer time to invest, you can afford to face the risk of market fluctuations to a degree. If you are risk-averse, there are more conservative investment options such as bonds or mutual funds that offer more stability. Ultimately, while investing does come with risks, it is still one of the most effective ways to grow wealth over the long-term, especially when approached with a well thought-out plan.
Question
Why is less emphasis laid on owning a typical savings account?
Answer
Traditional savings accounts have long been the norm for managing money as they offer a safe and convenient way to store money. However, the interest rates offered by traditional savings accounts are quite low, often not even keeping pace with inflation. This means that over time, the real value of your money kept in a traditional savings account can diminish.
On the other hand, alternatives that offer higher returns, such as a high-yield saving account, or even investing in stocks or bonds could provide higher returns and offer you better opportunities for building wealth. These options enable your money to work harder for you and potentially earn much more than it would if it was sitting in a traditional savings account. Although some of these alternatives carry some risk, the potential for returns far outweighs what a regular savings account can provide.
The role of a typical savings account is still important for liquidity. However, when it comes to your long-term financial goals such as financial stability during retirement, buying a home, or growing wealth, alternative investment vehicles offer you far more potential for substantial gains. This is why you would often hear more about investing and high-yield saving account than the traditional savings accounts
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