Even though our society could use a little more financial education, things seem to finally get on the right track.
More and more people are interested in learning how to build a financial safety net and what to do with their hard-earned money.
Of course, a significant part of your income goes to monthly expenses, such as groceries, bills, and commuting. But what if you start noticing you are left with a bit of extra money at the end of the month? Where should this money go?
Saving and investing are two of the most popular ways people decide to build their wealth. Some consider putting your money in a bank account works as a good-enough financial safety net, while others consider investing is a much better option because it can help you make more money.
No one can say for sure that one option is better than the other because individuals have different needs and require different financial services to satisfy those needs.
If you are looking to start building your wealth, you are probably wondering whether to save or invest. In order to make an educated choice, you need to take into consideration some factors. Below, we will explore both options, together with the benefits and disadvantages they bring, to make your decision easier.
Saving – advantages and disadvantages
As you probably already know, saving money is the process of setting cash aside in a safe, but liquid account, so that you can have access to them as quick as possible. The options are plenty, including saving accounts and checking accounts.
The main benefit of saving money is precisely the fact that you will have a pile of cash that you can get access to whenever you need. Something happened, and you lost your job? No problem, because you can dive into your savings until you find another one.
Another advantage is that savings can help you reach your financial goal faster, as long as you set aside a proper amount of cash every month. If your financial goal is to reach a certain sum of money by the age of 40, then a savings account may be a more secure option to do so.
In terms of disadvantages, inflation is your savings account’s main enemy. Due to inflation, your money can decrease in value as the years pass. Just look at house pricing. In 1940, the median home value was $2,938, whereas, in 2017, it reached $199,200.
Investing – advantages and disadvantages
In terms of investing, there is an array of benefits awaiting as well. One of the biggest ones is that your money can grow faster than they would if you would just put them in a savings account. Investments have a higher return on investment than savings do, which means you will have a chance to reach your financial goals faster. Basically, it means every dollar you set aside has the potential to help you earn more money over time.
Investments are often considered risky, but that’s not entirely true. Investing gives you a lot of options to choose from, and while it is true that some poses a higher risk than others, there are also plenty of safe choices. With a savings account, you only have one single choice – setting money aside and waiting for it to accumulate interest. With investing, there is an array of opportunities awaiting. You can invest in stocks, bonds, forex, dividends, dividend aristocrats, and many other options.
The world of investments does not come without some disadvantages as well. The most significant one is the fact that the investment market can be quite unpredictable, especially in times of financial crisis. This is why it is important to spread your money across multiple types of investments to maximize your chances of success.
How do I decide which one to choose?
Deciding what to do with your hard-earned money is not easy, we know. But if you care about your financial security, you need to start making choices. Ideally, you should have some easy-access money that you can get your hands on in case of an emergency, so it is advised you also set some money aside before you start investing. But how do you know if it’s enough? To decide whether it’s time to invest or not, ask yourself the following questions:
- Do I have a proper emergency fund?
Don’t start investing if you don’t have a secure emergency fund. How much money to have in your emergency account is ultimately your decision. If you are living alone and your income is not very secure, a proper emergency fund should mean at least 9 months of expenses. For couples with two incomes and secure employment, the sum should cover around 3-6 months of expenses.
- Do I afford to not touch the money for the following years?
Investing does not yield profits overnight, so you need to be committed to not touching the money for at least 2 years. This will give your low-risk investment portfolio to time to work for your advantage. Sure, it takes time, but you will thank yourself in the future.
- Am I prepared to face the investment market?
No financial market is without risks, and if you want to invest, you need to be willing to accept those risks. Meeting your financial goals through investing requires you to understand the market and be aware of the fact that it can always have ups and downs, and some can be quite unexpected.
If you answered “no” to any of the questions above, then it may be time to focus on savings first and come back to investments once you have built a safety net.
Make sure you have your financials in order before anything else
Both saving and investing are important tools to build your wealth, but only if they are used at the right time. Before you decide whether to save or invest your money, make sure that you have your other financials in order as well.
Pay off any debt, work on your retirement account, build an emergency fund, and after that, take your money and invest them. This is the key to financial security.