The Real Reason You Might Want To Save Before Investing In Stocks

Saving and investing are two peas in the same pod. For some, investing serves as a way to save for retirement or an emergency fund whilst also having your funds work and earn for you.

Saving and investing are two peas in the same pod. For some, investing serves as a way to save for retirement or an emergency fund whilst also having your funds work and earn for you. For others, the idea of investing only comes up when there’s a bag of cash available to invest with. While both ideas are good, the purpose of this article is to shed light on the need to have a financial buffer before commencing the investment process and this is based on specific investment assumptions and principles. They include:

1: You Invest With Spare Cash

There is a pecking order with investment and this is based on our individual needs as humans. Just the same way you cannot start thinking about purchasing a car or a new phone when you haven’t eaten properly, you cannot successfully invest if you cannot meet your core needs first. In order to not be pressured by the movements of the market, it is important to invest with funds you can spare or quite literally forget about.

2: You Make Purchases Every Month

In order for you to be a consistent investor and leverage market movements across a range of prices, it is important to invest periodically – preferably on a monthly basis. It is also a great idea to set aside specific amounts of money or a fixed percentage of your income to make it a habit.

3: You Invest For The Long Term

This is a strategy we are particularly focused on in Yochaa and there are two main reasons for this. The major reason is that volatility thins out over the long term. Over the long term, what helps you earn money is that you have invested in a company with strong fundamentals and not short term price fluctuations.

4: You Invest In Dividend Stocks

Dividend stocks are stocks from companies that ensure they pay dividends. With these companies, whether their prices are high or low, they pay dividends. These companies give you the opportunity to earn from not just price movements but also from dividends earned. To make money off your investments, you simply reinvest your dividends and embrace the power of compound interests. So even when your investment portfolio is down, you still receive dividends!

Given the foregoing, the reason you will need a level of savings to invest is so that you can beat the cost of commissions / transaction charges. For example, let’s say you are to pay a commission of N1000 on every investment you make. If every time you invest, you invest only N5000, the high cost of commission could cancel out your current and even potential gains for a longer period of time. However, when you invest N200,000 and you pay the same price per transaction, you have more to gain based on the economies of scale. This is even more so for those who trade stocks as trading requires that multiple transactions are done on a daily basis. Unless you ordinarily are liquid and earn a salary that you can extract huge sums of money from on a monthly basis, a combination of saved up funds and monthly earnings will do better in ensuring you invest bulk sums so you don’t end up spending a huge percentage of your monthly investments on financing the process of investing in the first place.

Written by Lawretta Egba.