People with healthy levels of savings, and good saving habits, do not put as much pressure on their investments as people without those good habits.
Your level of savings has to do with the pressure you put on your plan, and in particular your investments. The more you save, the less pressure you put on your investments, the less likely you’ll choose “get rich quick schemes”.
Too often people invest in “get rich quick” investments because they have a lack of savings and good habits. They can see that if they don’t strike it rich in something, that they’ll never be able to retire. These people usually fall for the idea that risk equals return. In their mind, they only have one swing, and because of that, they’re going for the fence.
People with healthy levels of savings and good saving habits do not put as much pressure on their investments as people without those good habits. Financially successful people tend to invest more conservatively because they do have a lot to lose. They aren’t extremely dependent on one investment working out, because they have multiple investments going on. They know they have more than one swing and more than one out. They understand that building wealth has more to do with hard work, good habits, and efficiency than getting high rates of return.
Just a quick note on the overall level of liquid savings a person should have: A person should have at least six months of income stored in liquid, accessible, and guaranteed accounts. The reason for this is simply that most disability insurance plans (including Social Security Disability) do not begin to pay benefits until after 6 months of a disability. This level of liquidity also provides a safety net for six months, should a person lose his job.
Oftentimes people ask me “when are we going to talk about investment opportunities?” The answer is: it depends. A successful financial plan has priorities. For example, it’s a higher priority to have health insurance than to buy whole life insurance. If you are married, it is a higher priority to have your Wills and Advanced Health Care Directive and other estate planning documents than saving for retirement. It is a higher priority to have six months of savings than it is to invest. This doesn’t mean that a person cannot work towards all of the priorities at the same time, but it does mean that the emphasis (usually meaning more money) should be placed on certain areas of finance over others. Investing is usually close to the last priority.
The macroeconomic model’s structure outlines the priority by placing the Protection Component above the Savings Component, and the Growth Component on the bottom.
It is a huge mistake to skip over or cheaply structure your protection component and savings just to get to the growth component. Again, people who skip over the priorities, may reach great heights financially, but usually crash without the proper safety net in place. They are the foolish and imprudent pilot. If you don’t already have six months of income stored in a guaranteed, liquid, and accessible account, make it a priority in your finances and place more emphasis and more dollars towards obtaining it.