Have you ever found yourself in situations where juggling between the many expenditures, investments, and savings just seems impossible? It often happens that in our busy everyday lives, we may not have a sense of how much we are spending. But for some of us, it is only when we run into financial troubles like budget shortfalls that we realize that we have not found the right balance between saving, investing, and spending.

For the most part, the prospect of striking this perfect balance does not seem too difficult. All one needs to do is chart out an effective financial plan based on personal goals and allocate the budget accordingly into these three streams. But sometimes, people can find themselves in tricky situations and that is where financial advice may be needed.

To truly understand this trilemma, let us take an example. Consider a scenario where someone might wish to buy a laptop but their monthly budget just isn’t allowing. Should they go ahead anyway and use up their savings? Should they skip their monthly SIP investment and withdraw from the scheme? Or should they just postpone buying a laptop? In all these cases, the opportunity cost is huge. Using up savings that you have set aside for a different purpose, say, a medical emergency, is not really advisable. Missing out on investments and withdrawing from schemes can disrupt your investment goals and lead to losses. At the same time, putting off buying that laptop could mean losing out on projects, online courses, upgrading a skill, or even office work. 

balance between saving, investing and spending
Finding the Right Balance Between Saving and Spending

How, then, do we navigate such situations? To answer this, we first need to understand why both savings and investments are important, and how together, they help to create an effective financial plan.

#1 Saving and Investing – Risk versus Returns

While the concept of spending requires little introduction, saving and investing often requires a bit of clarification. Investing is something that people indulge in to obtain larger returns on their wealth. For this reason, investment often involves a relatively higher amount of risk. Investment, therefore, is done to achieve larger goals such as buying a house or creating a retirement fund. On the other hand, saving is for smaller goals. It involves a negligible amount of risk and negligible returns. Therefore, between savings and investments, there is a bit of a trade-off when it comes to risks and returns. But since the goals of both are different, one cannot be a replacement for the other. To attain a good balance, both are equally important.

#2 Liquidity

Another aspect here is liquidity. Savings in banks are more liquid than investments. Higher liquidity means that those funds are available more easily. This is particularly important for emergency expenditures like visits to the hospital, urgent travel requirements, etc. Allocating adequate amounts to bank savings and liquid investment funds is imperative while also investing in long-term investments since they provide higher returns.

#3 A Financial Plan that Creates the Perfect Balance

balance between saving, investing and spending

This brings to the most important step – creating the financial plan. The foremost thing would be to analyze your short-term and long-term goals, select appropriate investment vehicles, and allocate the amounts accordingly. Generally, monthly investments are a better option compared to lump-sum investments since they have the advantage of dollar-cost averaging and it is easier to pay smaller amounts every month. In addition to this, a certain amount must also be allocated to savings. As far as expenditure is concerned, it is always best to spend within one’s limits. Here are a few tips to consider.

  • Make a distinction between essential and non-essential expenditures and set your priorities.
  • Diversify your investment avenues and look into tax saving plans. 
  • Look into new-age credit options such as EarlySalary to meet short-term demands.
  • Be receptive to changes and adapt accordingly. Sometimes, making adjustments to the original plan becomes necessary.
  • Evaluate your finances and estimate your returns.

Conclusion

Now that we understand how to strike a balance between saving, investing, and spending, we can find a better solution to the example presented earlier. For a person who wishes to buy a laptop from their monthly budget, using up all savings or withdrawing from investment schemes can both be unadvisable options. This is where new-age options like instant credit or no-cost EMIs from EarlySalary can offer a way out and allow customers to spend without adverse effects on their savings or investments. 

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