Saving or investing your money is up to the individual and their needs. Saving your money is risk-free and rewarding as you watch the numbers in your bank account climb. You can get better gains from investments, but they carry higher risk.
We will cover:
- The Benefits and Drawbacks of Saving.
- The Benefits and Drawbacks of Investing.
- How Do I Know Which is Right for Me?
- When To Save.
- When To Invest.
The benefits of saving
Saving your money has many benefits. Not only is your money safe, but you are also unlikely to see a decrease in funds until you decide to withdraw some.
Interest rates
If you are savings savvy, you can switch between banks that offer high-interest rates for introductory periods and make even more money. These rates are usually pretty good, especially when compared to regular rates.
Don’t forget to switch to another bank once your introductory rate period is over.
Great for goal setting
Saving is perhaps the best way to start your money management journey. Because saving is steady, you can easily set goals to help you scale your bank balance.
The drawbacks of saving
Although saving is better than not saving anything at all, you must consider these points before putting all your money in a savings account.
Inflation
Inflation is the bane of many savers. Why does inflation make your savings less valuable? You lose purchasing power on the hard-earned cash you have worked hard to earn.
There is no way to protect your money from inflation, and interest is always lower than the current inflation rate, so there is no escape from this situation.
Time consuming
If you are strapped for time, investing your money in a long-term savings account probably isn’t for you.
If you do not have a particular goal for your savings or a deadline, slowly saving is fine. However, your money will not multiply due to historically low-interest rates – unless you deposit substantial sums.
The benefits of investing
Thanks to the internet and banking apps, investing is no longer restricted to Wall Street experts. Anyone can invest their money, but there are potential pitfalls that all should be aware of before placing your investment.
Higher returns
Although there is no promise of high returns from investments, it is more likely that your money will grow faster if invested adequately than sitting in a bank account.
You will be lucky to see a 1% or 2% interest return on a typical saving account. However, investment returns can go up to 100% if you strike lucky, have enough experience, or hire a very experienced day trader to invest for you.
Less money investment
Even though investing is riskier than saving, you may not have to put down as much of your own money to reach your financial goals with this method.
Paying out $1,000 in investments could see your sum grow substantially over the next 12 months instead of saving the $1,000 in a traditional bank account that may give you a few extra dollars at the end of the year.
The drawbacks of investing
Everything has its disadvantages, and investing is no exception. So, even though the stock market is full of opportunities, experts always advise investing cautiously.
It is best to invest small sums first to get a feel for the process if you are just starting out.
Risk
Risk is perhaps the most significant reason most people are turned off by making investments.
The more money you deposit and the way the market is feeling, the more risk there is.
The reality is that you can lose money when you invest and sit by as your investment decreases. The only way to protect yourself against this somewhat is to hire an expert or do due diligence and research before investing and only make minimal investments at first.
Sacrifice
When you invest your money, you give up access to that capital for some time in exchange for earnings.
So, unlike savings accounts, you cannot quickly dip into an investment fund if you need some emergency cash – well, not while it is invested.
How do I know which method is suitable for me?
Whether or not you should be saving or investing right now depends on your circumstances. You can start by looking at your spending and savings and figuring out how much money you have leftover in your budget for saving or investing.
Once you have completed your budget and know exactly how much you can save or invest each month, ask yourself the following questions based on advice from our financial experts.
Can you afford a long-term financial commitment?
Some investments may require you to leave your sum invested for several years. Of course, you could also face these conditions if you decide to place your money in a high-interest frozen ISA, but even the highest interest ISAs yield meager returns compared to investing.
If you can go without your cash for a few years, you may consider investing your money in a low-risk investment portfolio. If not, then regular saving may be the way forward, as you can access the sums anytime you need them in a savings account.
Do you have a financial safety net?
Before deciding whether to save or invest anything, always make sure you have a lump sum to fall back on should emergencies strike.
Building up a short-term savings plan may be the best route to invest in, but if you have a sizeable nest egg already in place, you can invest with greater peace of mind.
Typically, experts advise:
- Couples with steady incomes should have three months of expenses saved.
- Couples with flexible but less secure incomes should save six months’ worth of expenses.
- One year of expenses is required for those with a freelance income or a partner not working.
Can you handle the market?
Investing your money can be a thrilling experience, and not all of it can be very pleasant. This question concerns risk, as turbulent markets can occur at any time, and your capital will wax and wane accordingly.
Market forecasts are helpful, but they cannot guarantee complete certainty. Therefore, it is essential to consider the material and emotional impact an investment could have on your life should it ever take a nosedive.
When you should save
If you answered yes to only one or two of those questions, you should perhaps focus on saving. Of course, you are free to invest whatever money you have but err on the side of caution.
It is advisable to prepare the groundwork for future investments by making yourself as financially secure as possible in the present.
Choose a high-yield savings account and switch providers if your bank reduces your rate.
Although some savings accounts may ask you to lock in your money, you usually get a better interest rate when you do, so a regular high-interest account will do if you think you may need emergency cash in the near future.
When you should invest
If you answered yes to all the above, it might be time to plunge and start building wealth instead of just saving money.
Long-term investments can produce big yields, and if you are in a secure financial situation with plenty of cash to fall back on, then why not invest some of your extra capital and receive better returns than the average bank will give you.
Do your research, decide what kind of markets you are interested in, and set a budget for your first investment.
Conclusion
Saving and investing is not so straightforward, and neither is choosing the right path for your financial future.
Both methods have their advantages and disadvantages, and it all boils down to how much you can handle risk and how much financial security you have in place.
Those who have great flexibility with their finances have more choices than those who do not, but even if you only have a small surplus, it may still be worth investing a little to see if your initial investment grows.
Many people save money for investments and keep their money safe by reinvesting their profits.
Saving is an excellent first step toward investing for those who do not have additional cash to invest, and smaller, low-risk investment portfolios are an excellent start for those new to investing.
Before deciding what to do, speak to a financial advisor or a professional in the field for tailored advice designed for you.
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