The wealthy man spends less than he earns and invests the difference. The investments make more money and that money is reinvested. All is well as long as temptation doesn’t kick in; you consistently avoid buying luxuries, don’t buy a liability like a new car and steer clear of any unwise mortgages.
But the reality is there will always be a point in your life when you are tempted to ‘invest’ in luxuries or purchase something now that you should wait for. This is where you might consider the way of the balanced investor.
The balanced investor understands the need for savings and security, he understands the potential for big gains from high risk investments. The balanced investor also wants to enjoy the time and the money that he access to right now.
You’ve cut down on your expenses, increased your income, you have filled your emergency fund and now you are spending less than you earn. Congratulations – you can now set aside a percentage of your earnings each month to save and invest. The question you should be asking yourself now is, where do you allocate these savings? The balanced investor allocates his assets into three buckets…
1. The Security Bucket
Your security bucket is very important for the long term growth of your wealth. Your security budget grows slowly and steadily over time. This can be in bonds, cash ISAs and savings accounts. Investments into your security bucket provide an almost certain return on investment at a specified period of time. For example, if you put money into a bond you can lock it away for a set number of years and gain around 4% each year. You have a fixed rate of interest and a fixed period of time. This is a slow incline but it is safe and guaranteed.
2.The Growth Bucket
Your growth bucket is your allowance to invest money into higher risk investments for a greater and faster rate of return. This can be in stocks or shares. You could even decide to invest in real estate or into business ventures. Decisions made in the growth bucket should be tactical, calculated and well researched due to the risk of loss; you should be prepared to lose money here and you should be even more prepared to learn some lessons along the way. Ensure you can utilise compounding growth here by reinvesting any earnings back into your growth bucket.
3. The Dream Bucket
This is the exciting bucket; the treat bucket, the ‘do I deserve it?’ bucket. You can put money aside each month to save for a vacation, a meal at your favorite restaurant, a new car, a holiday home or a private jet. You can put as much or as little in your dream bucket; by placing money in here you are highlighting that this is money you will enjoy and will enjoy and will not regret spending.
So there you have it, this is the asset allocation of a balanced investor. Depending on your age, your goals and your financial awareness you can decide to allocate as much or as little to each bucket. The important consideration is that you are active in learning to benefit from growth investments whilst protecting yourself with an ever-increasing security fund. To hear a little more about asset allocation, check out Tony Robbins’ talk on Financial Freedom.
How are you currently allocating your savings? Do you feel guilty enjoying your money?