Are you investing, saving, or just collecting?

We work with expats and international professionals right across the EU, to ensure their money is working for them, and that their life goals remain on track when living an international life. However, for us to make recommendations in a financial plan for how to apply your assets towards your future goals, we need to be mindful of how you see your money, and how you use it.

One of the questions we ask is this: when you have the opportunity to put money away, do you save, invest, or collect? This is a reflection of your money personality.

The saver

A person that saves as their only wealth accumulation strategy, by putting money in the bank, or worse, under their mattress, often has good intentions in taking this course of action, but it can have unintended negative consequences.

The reason some people like this strategy is that it is not subject to market volatility, so the amount today will be the same as the amount yesterday, and tomorrow. If you add to it periodically, you also see the balance growing in a steady manner.

The problem with this is purchasing power, an impact of the steady erosion of inflation. It is invisible in that the amount of money in your account hasn’t changed, but what you can do with it has. If you have €100 in a savings account at the beginning of the year, you could go and buy €100 worth of something, let’s say cheese. At the end of the year, if you still have €100 you can still go and buy €100 worth of cheese, but you might notice that you get less cheese for your €100 at the end of the year than you did at the beginning of the year. One year is not such a long time frame, so compare instead how much cheese you might be able to buy for €100 in 2003 with how much you can buy this year. The amount you can purchase with the same amount of money will have about halved.

That is how inflation erodes your money.

Taking a savings focused approach is not bad, and it should be an important component of a plan, but it should not be the whole plan. It is great for meeting cash flow requirements, to cover unexpected expenses, and for emergency funds. Also, if you have a large expense coming up soon, it is best to keep the funds in cash. Low risk and not losing is most important in this situation.

The collector

This is usually either a lifestyle choice where someone is following a passion, or a habit based on something they once did and decided to repeat. We are all for following your passions, but the purpose is important. This means, like the saver, it can be good for part, but not all, of your money.

The collector is such a broad catch-all group that outcomes as measured by return on investment can fluctuate broadly.

If someone uses their money to collect non precious items, match boxes, bottle tops, or old newspapers, it might be fulfilling but will probably not be financially rewarding. If these items don’t appreciate in value over time, it could leave you like the saver, with an erosion in purchasing power. This could even be worse if the items lose re-sale value over time.

If you are a collector focusing on fine art, diamonds, rare Pokémon cards, or some item that does have a likelihood of appreciation, it can be different. You may well increase your wealth by more than inflation. The question then is what is the purpose? If it is to collect for the passion of the object, that is different from collecting to grow wealth for future retirement income, for example.

There are many factors to consider, such as whether there is a ready market for you to sell if you need money, how you store the items so they don’t lose value, and how you protect them from damage or destruction, wear and tear or theft. Imagine if your life savings disappearing because of a fire or a burglary. There will be costs in maintaining these assets, and costs reduce your returns.

Our position is that it is great to follow a passion, but from a financial planning perspective, you should be doing this with surplus funds; money that you don’t need for your primary goals, like retirement income.

Collecting is rarely a good sole financial planning strategy.

Investor

This brings us to the third, and probably most familiar group, the investor. I will start with a negative point: just because you are investing, it does not mean everything will be ok. It does matter how you invest and the process of deciding where to invest.

If you don’t have a financial target, you won’t know when you get there, or even if you are heading in the right direction. This is where we add a substantial amount of value for our clients. We take the time to help you to understand the big ‘WHY?’ of your life and uncover what is most important to you. We then build a structured financial plan that focuses on what is most important for you, and manage and monitor your plan, your savings, and your investments, so you can achieve your goals.

Investing should be strategic and deliberate. It should be the output of a financial plan, the tools used to help you achieve your objectives. In line with the comments above it should also not take 100% of your money. You should still have money in savings, and if your passions dictate and you can afford it, perhaps some collections.

If we define wealth creation as your money growing faster than inflation, investing is the primary means through which you will do this. Where you invest is just the means to an end and is dependent on your goals, your attitude to risk, and your time frame amongst other factors.

Whether you are a saver, an investor, a collector or a bit of each, speak with us at Black Swan Capital and we can help you implement the financial plan that will put you on the right path to achieving your goals. Head over to our Contact Page to get in touch.