When to stop saving and start investing?

Question

Since I started my first job after graduating a few years back, I always saved a certain percentage of my salary each month on an extra savings account my bank offers. At that time, and until recently, that seemed to make sense.

Now I have, in my opinion, saved a lot of money and I'm thinking whether or not to stop putting more money into the savings account and instead use the money to invest.

My thinking is, if I got a certain amount saved and I'm sure I won't need to use it completely in an emergency (buy a new car if mine broke for example), why put even more money in the savings account instead of investing it and (hopefully) make more money with that?

I'm currently wondering what is a good point to stop saving. Should I stop at all? To clarify: I'm considering saving (setting aside some money on my savings account) and investing (actually doing something with the money, like buying estate, stocks, etc.) two different things.

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To address further information: I'm currently not in debt in any way nor do I have to pay a student loan. I got a steady income every month and, apart from wanting to move out soon, I'm not planning on spending any huge amounts of money.

Regarding some comments, I'd also like to add that I'm also already paying into a employer-funded pension (correct me if this is the wrong english term for it), which should give me a nice pension on top of the governmental pension, which seems not to be sufficient enough anymore until I'm able to retire in about 40 years (heck, it does not seem to be sufficient enough anymore already today). But I'd also like to invest the money I got left to some degree, because otherwise it would just lay around useless.

Answer 1

Given your specific situation, being debt free and in Germany where there are supportive social structures in place for potential unemployment etc, I would consider the following:

1. Depending on your industry and how easy it is to get a new job if suddenly let go, have a small emergency fund. Nothing fancy needed especially if you live in a city where public transportation is running well, and you won't be needing a car if you even own one currently. For instance, as a software engineer in a country with unemployment benefits in a city that has adequate public transports anything more than 1-2 months of wages would be excessive.
2. Time to use all these existing funds currently idling in your savings account. To put it into perspective you gain at most negligible amounts (to the tune of 0.30% according to Google) where inflation eats into that balance about six times as fast (at a rate of around 1.8% for 2018). While this is better than nothing, this is clearly not a very good use of capital. If you plan to get a downpayment for your own house soon then, by all means, this is fine. If not you need to make your money work for you. Investing in ETFs seem to be the reasonable thing to do here, since you diversify and you invest in the long term prosperity of the whole market instead of trying to gamble with specific companies that may or may not exist when you retire and will eat your time trying to manage actively.

If you're fine with their fees (which can eat into profits over time but in exchange you need not to lift a finger managing your investments), you can use an online robo-investor platform like etfmatic.com that accepts German customers to create your goal and start your journey. They will automatically choose a balance of EU/US/JPN/developing countries mix for you, and you can also put forth specific goals like possible retirement dates, risk exposure, etc while rebalancing your portfolio automatically to keep it within your specified goals. I find an 80% equity 20% bonds a reasonable long term portfolio allocation, but you can even go for a 100% allocation with a retirement date set, so they can adapt your portfolio to a more risk-averse allocation the closer your retirement goal date nears.

Answer 2

Here's the general order of things:

1. Keep 3-6 months of expenses in a savings account for emergencies (lose your job, car accident, mauled by dingos, etc.)
2. Pay down all your debt as fast as possible.
3. Make sure you're contributing ~15% to your 401k, IRA, or similar personal retirement account.
4. Invest everything else into a brokerage account for long-term goals or put it in savings for short- or medium-term goals (new car, house down payment, future tuition bills, etc.)

Check out Dave Ramsey's baby steps to financial freedom, which are very similar to the above. Just note that he's religious - I'm not religious at all but much of what he says is very good and doesn't require you to be his kind of religious.

Answer 3

I never quite saw the difference between saving and investing - some investments are very safe but with lower return, savings accounts are just another safer-with-lower-return options.

So, assuming you're not tying your money up in something like a pension where you cannot get your money out until retirement age, you only need to consider the risk levels you're prepared to accept. (and your knowledge levels of investing, you see, I have this bridge for sale, great investment....)

If you just want to increase your risk slightly and gain a greater return, you can do that today. Remember to diversify (ie not put all your eggs in one basket) and beware the old "too good to be true" options and rampers on the internet telling you of the "next big thing". Start cautious and build up your knowledge, or move your savings into packaged funds of equity or bonds.

Answer 4

One rule of thumb is to keep 3-4 months of expenses in cash if you have a steady income, 6 or so months of expenses in cash if you do not have a steady income. (I am a contractor and use the latter rule.) One consideration here is people are bad at computing their expenses so it can be helpful to use a budgeting app to e.g. compute how much you should be saving each month for stuff you only buy once a year, to get a good sense for how much you should actually be budgeting each month.

Beyond that I would put money in the stock market.

(Assuming obviously you are not carrying any long term debt like credit cards or student loans; I would pay down those first before investing.)

Answer 5

Should I stop at all?

That's an interesting one. I suppose you'd want to ask yourself what investing really means to you first.

Money investment is quite an abstract notion; For some investment is putting capital at risk (sometimes very high) to gain profit (sometimes very) quickly, for some others is purchasing several properties in order to increase their monthly income through renting, for some others is just freezing money value over time by buying commodities that historically have been proven inflation-proof.

I'd suggest you follow your needs and mindset instead of just following the latest trends and tendencies you see around. And if you do so, make sure you have a very good understanding of the sector you place your hardly earned money.

Here's what I've chosen for me; Because I can by fussy about my capital, I have preferred not to risk any part of it; at all. What I do instead is to continuously save portions of my monthly income that I feel I have nothing else to do with it. I maintain different currency accounts with the strongest currencies worldwide and try to re-distribute my capital now and then depending on different factors each time. Occasionally, I also purchase bullion coins which are relatively easy to liquefy and which I consider a good option for easily accessible funds in a few decades from now.

As you can see from my example, I have chosen not to stop at all! I may be wrong on that but writing down that dilemma at the end of your long question (especially in bold) I get the feeling that playing safe is what you'd deeply be inclined to do but your environment makes you put that to question.