Learning to invest: Saving money

Here on steemit, the great majority will already be familiar with investing in cryptocurrencies. And while we all love the historical returns of crypto, a good investment portfolio is well diversified. Having multiple crypto coins is certainly more diversified than holding just BTC or ETH, but a truly diversified portfolio has holdings of different asset types, and all digital currencies are the same asset type: crypto. In the same way that no portfolio should consist of only bonds, a portfolio of only crypto is also incomplete. 

Before I ever got into crypto, I wrote an ebook on getting started in investing because the sad truth is that the average citizen doesn't invest at all. It's usually because they feel unqualified and are afraid they'll lose money, or they don't understand the principles of compound interest enough to know that a little saving today turns into large gains in the future. One of the most important steps to building wealth is to control spending to the point of being able to make regular contributions to an investment account. Saving money is a matter of budgeting and personal accountability, and it's a skill that must be learned through continuous practice. But like all skills, it gets easier after learning the basics.

So here is perhaps the most important chapter from my investing guide:

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 Step Four - Save Money

Term to know: Compound Interest - A cycle of interest where interest that accumulates on a principal amount is added to the principal before the next period’s interest is calculated; in short, it’s interest on interest.
(Example: $100 is deposited into an account that yields 5%; during the first period, the account gains $5, which is automatically reinvested. The next period’s 5% interest would then be calculated off of $105, which would be a gain of $5.25, and so on and so forth) 

This is likely the most difficult step on the journey of investing, but it’s obviously very necessary. Creating a simple budget can be helpful as it informs you about your average monthly spending, which then makes it easier to determine where cuts can be made. Creating a budget involves looking at two to three months of bank statements and listing (in a document/spreadsheet, not just in your head) out your bills first (including groceries), then gas, then food (restaurants) and entertainment. 

Cutting unnecessary spending is one of the best ways to save money, and that’s usually in the food and entertainment category. Francis Kinniry, a principal in Vanguard Investment Strategy Group, recently pointed out that over 30 years, investing the cost of a $3.50 coffee every day into a portfolio with a 6% annual return could amount to over $100,000. When factoring in compound interest, even small savings really add up as the total principal paid in that scenario is only $38,000. That means more money is earned from interest than from saving. 

Some other saving methods include buying more groceries and eating out less, filling the car’s gas tank all at once, and making sure you’re on the cheapest phone and TV plans that suit your needs - there are usually promotions available for TV/internet, and no-contract phone plans are often cheaper than contract plans. 

Don’t rent or finance anything that you can buy after only a few months of saving, and that includes your phone and car. It’s also a good idea to overpay on your car note and mortgage before investing. Interest paid is money you’ll never get back, and overpaying on a loan always reduces the total amount of interest paid as long as the loan doesn’t include overpayment penalties (which should be avoided). If you’re currently renting, then saving for a home should be one of your top financial priorities as rent paid is also money you’ll never get back.

After your budget is set and you have an amount that can be consistently invested, it’s ideal to set up automatic transfers to the various accounts that you’ll be opening in the next step. Once you do this, you’ll notice that you’re not missing that money as much as you expected you would. 

A portion of your assets should always be held as cash in a regular savings account. Set aside enough to easily cover your car, medical, and home insurance deductibles, plus what you need for vacations, gifts, large purchases, etc. It’s okay to invest while building your savings to the level that you desire.

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If you'd like to read the entire book, you can purchase The Shortest, Most Straightforward Guide to Investing.
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