Do you have some disposable income you want to make good use of? Are you looking to buy your first home or save up for a trip? Or maybe you just want to set something aside for a rainy day. Whichever of these goals you have in mind, you are likely wondering if it’s better to start saving or investing.
Let’s look at both options to help you figure out which is the better option for you.
The Difference Between Saving and Investing
Saving is usually considered a prudent choice if your goal can be achieved in no more than five years. If you are buying a house or planning a vacation, you can get there with a savings account.
On the other hand, investing is better for reaching long-term goals: retirement fund, college fund, a fund for your grandchildren. The more patient you are, the more money you are likely to walk away with. Ideally, you want to hold onto a stock for at least five years and time your exit when it’s at a high.
The Basics of Savings Accounts
Savings accounts are low-risk, but they also have lower returns. When you deposit money in this account, it will accrue interest over time, but at a typically lower rate than an investment can potentially provide, but without the added risk as well.
The longer you leave your money with the bank, the more you will walk away with. There are accounts you can keep adding to every month or year, so you can think of it as a piggy bank that also makes some money.
The Basics of Investing
There are numerous ways to invest: stocks, bonds, mutual funds, real assets, etc. Your choice of investment type will directly impact how much you can expect to earn and when.
While this rule is by no means always true, in the most general terms, the higher the potential earnings, the higher the risk. Investing in blue chip stocks, for example, is considered very low risk, but the yield you can expect won’t make your risk overnight.
On the other hand, when you invest in stocks that have a very high potential yield, you are also risking losing your money if the company goes out of business, for example.
The Pros and Cons of Saving
If you are considering opening a savings account, here is what you need to know:
- Savings accounts are safe and come with very little risk.
- If you need to access your funds quickly, for whatever reason, you can do so easily.
- They are easy to set up and don’t require too much paperwork.
- You know exactly how much interest you will be earning and when, which makes it much easier to plan.
- Your deposits are protected and guaranteed by the government.
- There is no learning curve involved, and you need very little to no financial knowledge to open one.
There are some drawbacks, of course, which you also need to take into account:
- Returns are low.
- Over time, inflation will eat away at some of your interest and impact your purchasing power.
The Pros and Cons of Investing
While saving is certainly safer than investing, it is not the best choice if your goal is to accumulate wealth and earn a lot of money. Here are the benefits of investing:
- Investing has a much higher return than savings accounts, as you can see upwards of 10% of annual yield.
- Stocks, bonds, and ETFs are highly liquid and can be turned into cash on practically any day of the working week, so you will still have access to ready money, should you ever need it.
- If your portfolio is diverse, you can expect to beat inflation over a long period of time and increase your purchasing power.
There are some drawbacks you should carefully consider before you start investing:
- Returns are never guaranteed, even when you invest in the safest possible stock.
- It is highly probable you will lose money, at least in the short term, so you need to be prepared for that.
- Depending on the time you choose to sell and the state of the economy, you may not get the money you invested back.
- Fluctuations and volatility are a part of the game.
- The longer you leave your money in an investment account, the more you are likely to earn, so you shouldn’t have access to these funds for at least five years.
- Investing is complex, so you will either have to consult an expert or teach yourself a lot over a short period of time.
- Investing takes up a lot of time, as you will need to keep an eye on the market and your investments.
- Fees can be high if you work with a brokerage account.
When to Save
You are advised to save if you need more money in the next few years. If you don’t yet have an emergency fund, you should start a savings account before you ever consider investing. Aim to set aside at least six months of expenses in this account.
If you have high-interest debt, work towards paying that off before you consider investing, as paying off a loan can prove to provide a higher return than investing.
When to Invest
Consider investing when you have an income you’re comfortable with. If you are prepared to let your investment sit for five years at least and you’re comfortable with the risk, start looking at stocks or bonds.
If you already understand finances and the stock market and are confident you can figure out what the best stock options are, it’s a good idea to consider investing.
Wrapping Up
Making the choice between saving and investing can seem difficult at first glance. However, when you take into account all the pros and cons and carefully consider them against your needs and goals, you’ll be able to easily pinpoint the best option for your particular scenario.
Don’t forget that there is nothing preventing you from saving and investing at the same time, provided you have enough income.