In the previous issue of Nexus, we talked about creating a budget to help you start saving. In this issue, we’re going to look at some things you can do with the money you’ve saved.
The most important thing to do with your savings is to create an emergency fund. This is cash set aside to tide you over if you lose your source of income. To decide how much you need, look at your expense-tracker app to see what your average monthly expenses are. Generally, it’s recommended to have three to six months of expenses in your emergency fund.
Of course, having a larger emergency fund is better, as it gives you more flexibility. For example, if you lose or quit your job, you can take a little longer to find a new job that fits you instead of taking the first offer that comes along.
With an emergency fund set aside, you should now consider investing some of your savings, as money left in a bank account is losing purchasing power to inflation. For example, just think about what you can get for $15 at your favourite restaurant now compared to two years ago.
There are many things that you can invest in, but in this issue, I’ll be talking about exchange traded funds (ETFs). In a nutshell, ETFs are investment products that track an underlying index or asset, and they trade on a stock exchange. They are popular investment products because they allow you to gain exposure to a large number of asset classes at a relatively low price.
For example, one of the largest and best-known ETFs is the SPDR S&P 500 ETF, which tracks the S&P 500 index of 500 stocks. You can buy one unit of this ETF for just under $600 and participate in the growth and profits of 500 large companies such as Apple, Walmart, and Starbucks.
There are ETFs for just about anything you can think of, from the S&P 500 to companies involved in space exploration. When deciding what you want to invest in, try starting with an industry or theme that you are familiar with and believe in. Then move ahead with your research from there. Chances are good that you may find multiple ETFs that interest you. Compare these by looking at variables such as their expense ratios, manager, historical performance, and which stocks they actually hold.
I suggest learning more about ETFs by reading about them on investopedia.com or watching some YouTube videos.
My recommendation is to think about investing as a long-term process. Markets can go up and down, but in the long run, the general direction is up. The S&P 500 has grown about 10 percent per year on average over the last 50 or so years—inflation doesn’t stand a chance against those numbers.