Whether to invest or save is one of the most common dilemmas in personal finance management. Practice shows that the best option would be to organize your finances in a way that would let you do both simultaneously, although this is not always possible, unfortunately.
What is the principal difference between saving and investing and which option should you choose?
The choice should depend on how long term your financial goals are. Saving is better for shorter-term goals (three years, on average) like going on holiday, saving for a deposit on a house, or building an emergency fund. Investing, in turn, is better for long-term major goals, like building a retirement fund or a fund for your child’s education.
Liquid assets are those that can be used immediately or with minimal delay, no matter what situation you are in. In this case, saving is definitely the right decision, even though you should still be careful with the type of saving account you choose. The matter is that some saving accounts offer higher interest rates but limit your withdrawals, while others have lower rates of return but money are much more accessible.
In case with investments, however, your money are hard to access and you will be penalized for early withdrawals. In other words, investments should serve long-term goals, as mentioned above.
Risk and return
The basic difference between saving and investing is that savings have no potential to bring you substantial income, even despite high interest rates, while investments do have this potential. The issue is about risk: federally insured, your money in saving accounts are at minimal or no risk, while all the money you invest may be lost in the worst-case scenario. On the other hand, however, investments may bring huge profits.
Now, once you have found out the basic difference between saving and investing, it is time to calculate how much you should save versus how much you should invest.
Most financial advisors agree that in the majority of cases saving should come before investing. Exceptions are acceptable, but this is still the safest and most reliable method. Taking this into consideration, it would be unwise to start investing in case you do not have an emergency fund. In order to decide how much you will need, you should know your monthly expenses, including your mortgage and credit payments, food and utility bills, insurance costs and so on. A solid emergency fund, in turn, is supposed to let you cover all these expenses for at least six months. In such a way, having a liquid emergency fund is the best way to protect your investments. Otherwise, you would need to start selling them out in a time of emergency, which is definitely not a recipe for success.
Another reason to postpone investment decisions are debts. It is a real dilemma, taking into account that you may fail to build up a sufficient capital for your retirement if you reduce your leverage paying off debts. On the one hand, you may lose everything if you ignore debts completely for a long time. In some cases, the best thing to do is apply for a loan. Nowadays, installment loans are becoming more and more popular because they are extremely flexible and can easily be adjusted to the borrower’s needs when it comes about the loan amount and the length of time to repay the loan.
In such a way, whether to save or invest depends on your goals and current financial situation. If you, for instance, want to buy a new car within a year, you definitely need to save. At the same time, investing is a better decision if you want to pay for your child’s education (wedding, house or anything else) in 10-15 years. Nevertheless, saving is still better if you need this fund in a year or two. In other words, knowing your goals is the key to successful financial management!
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