When you’re just starting out on the journey to secure your financial future, it’s not always easy to stay on the right path.
Distractions are common, especially when the finishing line seems so far off, and the temptation to find a shortcut can threaten to overwhelm the sure and steady approach most financial professionals would advise.
It’s easy to get side-tracked if you’re constantly chasing the belief that ‘if I can just invest in the property/stock/investment that gives me the best return’ then the rest will take care of itself.
But this line of thinking can actually lead to a higher investment risk through a lack of diversification (investing in one of very few assets); a risk that can be further heightened through borrowing (for example, investing in property).
The real trick to staying on track is knowing what to focus on in the short term, and understanding how that will benefit the overall game plan in the long run.
Some of us spend our time worried about where or how our money is invested, tracking every little movement and wildly celebrating every win while passionately cursing every loss, regardless of how minor the fluctuation really is.
But investing is about playing the long game – separating yourself from the daily minutia (over which you have absolutely no control) to keep your eyes firmly focused on the future.
Instead, you should really be concentrating your efforts, especially in those early stages of the journey, on the one aspect that is 100 per cent within your control – saving.
By saving I’m simply referring to the act of intentionally putting money aside for a future purpose (rather than spending it now). This could be as simple as popping it into a bank account, or it might involve making additional contributions to your superannuation or adding to an investment portfolio.
Regardless of how you’re saving, and contrary to what many people believe when it comes to planning for your financial future, saving matters more than investing in the short term.
Consistent savings over a long time-frame lays a strong foundation for investment returns to do the ‘heavy lifting’ in later years.
This is not to say that how your funds are invested is not important; it is just not as important in the earlier years of accumulating wealth when savings will have more of an impact.
As a rule of thumb, if the target annual return will have less of an impact on your investment than your expected annual savings, then you should focus on savings. For example, if you have a $50,000 investment and expect a return of 6%, this would equate to an annual amount of $3000. But if you can save more than $3000 in a year then this is the area you should be paying attention to.
To look at it another way, if you have $100,000 invested in super, saving an additional $10,000 per year into your super fund will actually have a greater impact on your overall investment balance than the 90-year average investment return of 8.3% pa.
Don’t get me wrong – there will come a point in the future where investment returns become more important, and the compounding effect (of earning investment returns on investment returns, year after year) will take over.
The trick is to stay in the game long enough to make it happen.
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