The decision of whether to save or invest lies with you. It varies from person to person depending on their financial goals.
Regardless if you are just beginning the process of building your finances or have been doing it for years, it is always hard to figure out when you ought to start investing or saving.
Saving is a safe choice because the savings account finances do not decrease unless you withdraw it. The interest earned from putting your money in the account doesn’t grow your money fast.
Interest rates are often affected by inflation rates; thus, your money could lose its value over time. On the other hand, investing allows your money to grow at a faster rate.
This may sound tempting due to the high returns and the ability to overcome inflation. However, with this comes greater risk as it is not all investments that will earn proceeds. Sometimes, the investment made can turn out to be insignificant.
Below are the upsides and downsides of both investing and saving on guiding you through your decision-making.
Pros of saving
- Money from your savings account does not potentially decrease.
- Saving enables you to attain your goal at the required time as long as you had a workable plan.
Cons of saving
- Market inflation can decrease the value of your money in a savings account. Even though the interest may partly counter the inflation effect, it is unfortunate that the interest rates don’t keep up with the inflation rates.
- Saving will take you a long time to achieve your goals due to the low-interest rates. If you are saving for an urgent purpose, that’ll mean you will have to set aside more money to achieve your goal.
Pros of investing
- Investing allows your money to grow faster than in a savings account.
- For a long-term investment, your returns will also earn money over time, thus enabling you to achieve your goals faster.
Cons of investing
- Investing is not always all good. The prices could depreciate when you are about to retrieve the money, hence leaving you in a financial dilemma. In such a situation, you have two options; either you get your investment back at a lower price or delay your targets.
When to know you are ready to start saving or investing
As stated earlier, realizing when to invest or save can be a hard task. If you feel stranded about what decision to make, you can always consult an expert financial advisor. Nonetheless, here are a few tips to guide you on when you are ready to invest.
Create an emergency fund
To begin with, create an emergency fund in your savings account, approximately $500 to $1,500. Relying on your credit card for small emergencies can land you in debt.
As an alternative, a small emergency fund is important to cater to small emergencies so as to avoid unnecessary debt.
Pay off debt
Next, pay off all the high-interest loans. Depending on your financial capabilities, you know what categorizes as high interest for you, but generally, anything from 10% and more is high interest.
Grow your retirement account
Afterward, acquire funds for your matching contribution from all workplace retirement accounts. If the contribution aligns with the funds, you deposit it to your retirement account, saving you money, and you shouldn’t ignore it.
Maximize on your retirement accounts
Subsequently, invest and maximize your Individual Retirement Account. You can either go for a Roth IRA or a traditional IRA, but whichever the case, it is best to invest in a tax-advantaged account.
Also, max out your workplace retirement account. This should follow after an IRA because you have several investment options. In a workplace retirement account, you can decide where to have the Individual Retirement Account and its investment with limitations to your plan’s choices.
Planning for major one-time goals
At one point in your life, you will require to save for a one-time big target like purchasing a car or a home. It is upon you to fix such targets in your financial plans. This means you will have to balance the retirement investments with these goals within your specified timeline.
With this, you will have to make a decision, whether to invest or save in order to achieve these aims. This varies according to the time frame and flexibility of that goal.
If you have a strict timeline to reach your goal, it is better to save; consider an investment if you have a flexible time frame. You could get high proceeds from the investment, but in a bad year, it could potentially delay your goal hence the need for flexibility.
How to make your decision
These two concepts will help you figure out which one to start with.
Short-term goals
When making the decision, if you want the cash by a specific time, it is better to save than invest. For savings, you face no possible risk of decreasing your money, unlike investing, where your amount can reduce in value.
Long-term goals
Investing gives you an opportunity to have greater returns. If your goal is long-term, you can invest and allow your money to grow. If things don’t work out as planned, you can still delay your goal as you wait for your investment to increase in value.
Invest and save at the same time
You can definitely combine saving and investing at the same time. Save up funds for what you urgently want and invest for that which is not urgent to achieve your goals. Why not put that money into work to earn you good returns at the end of it?
Another alternative when working with a long-term goal is starting with investment and steadily move to save as you near your aim. With this, you avoid an abrupt decrease in the investment value that will lead to the delay of your goal.
Conclusion
Ultimately, the final decision lies with you on whether to invest, save or do both. You don’t have to stick to one your entire life. You can juggle them up as priorities, and financial goals in your life keep on changing.