Is It Better to Save or Invest Your Money?
Updated: Feb 20, 2022
Saving and investing money is vital for a secure financial future. With unique purposes and roles, both are two entirely different things. So it is important to understand “Is It Better to Save or Invest Your Money?” before you set out on your journey to build wealth and find financial independence. Regardless of your financial status, it can be challenging to decide when to save and invest. And that’s where we can help!
While investing is tempting for most people due to the chance to overcome inflation with higher returns, there’s no guarantee that your investments will always go up. In fact, a major market setback can even make your investments completely worthless, if not a loss.
On the other hand, saving might be a safer route, but the interest rates on saving accounts usually don’t allow your nest egg to grow quickly. While your savings won’t typically decrease in your savings account unless you withdraw, the interest rates on saving accounts are usually even lower than the rate of inflation. As a result, your savings can possibly lose purchasing power with the passage of time.
So, if merely pros and cons are not enough to decide “Is It Better to Save or Invest Your Money”, how do you know when to take the safer route and when to take the plunge and invest? Keep reading to find out!
Difference Between Saving and Investment
While the difference between savings and investment is quite obvious for most to understand, you must also know how both can help you build your wealth practically.
When you save money, you put it into a savings account or a term deposit, usually offered by a bank. And of course, that part is easy to understand. But do you know how the money in your savings account grows? It is the interest on these savings accounts that is compounded daily, monthly, quarterly, or at some other time, allowing you to earn interest on your initial deposit.
That might make it sound like there is a no better option to grow your nest egg than to save. But the truth is, it isn’t. This is mainly because banks offer very low-interest rates, and the small gains you make on your savings are quickly taken away by inflation.
Now let’s take a look at investments. When you invest, you are actually buying an asset that is expected to increase in value over time, and it also offers earnings on it too. Some of the most common types of investments include shares, bonds, and real estate investments. But all sorts of investments come with some level of risk, and it is almost impossible to avoid it.
Thus, by the above comparison, it can be deduced that neither savings nor investments alone can help you meet your financial goals. Instead, what you need is a healthy combination of both in order to first find money by saving and then investing in savings to build your wealth.
Savings Vs. Investment Checklist
Whether, Is It Better to Save or Invest Your Money – largely depends on your financial goals and condition. But here is a list of questions that can help you decide if saving is better for you or investment:
Do you have a cash cushion to cover you for three to six months of fixed expenses? Investing all your extra amount without saving for emergencies and unexpected expenses is an awful idea that will definitely backfire. What you should do instead is build savings worth your fixed expenses for three to six months first. Once you have set aside this amount, you can then start investing the extra amount.
Can you commit to setting aside your money for long-term? Not everyone’s financial situation is the same. And not everyone’s monthly budget can allow them to set aside a good amount for two to five years or longer. However, if you can then you should consider a long-term savings account. Once you have built enough to afford a risky investment, you can then safely invest your money.
Do you feel you can take risks involved in investing your money for a long-term goal? If you feel that you are ready to take some level of risk by investing for a long-term goal like retirement, then investing is for you. Make sure that you understand that you won’t be able to access this amount until you reach your retirement without taxes and penalty.
Do you have a short-term financial goal that needs some considerable amount like a travel plan?
If you have short-term financial goals like a dream vacation or buying an expensive car, then savings is the right option for you.
Do you think you have saved enough to reach your retirement goal by your desired age? If you haven’t saved enough for your retirement to live in peace without financial trouble, then it’s time for you to start investing.
Regardless of your financial situation, the road to financial freedom starts with earning money, saving more than you spend, and putting your savings to work for you.
However, a major difference between savings and investment is the level of risk taken. On one hand, saving helps you earn a lower return with virtually no risk. On the other hand, investing offers a higher return with a considerable amount of risk. And this will help you to get out of the dilemma of “Is It Better to Save or Invest Your Money” at the end.
Needless to say, neither of the two options is better in all financial circumstances. And the right choice will only come down to your current financial position. If your financial situation allows, you can even make a mix of savings and investments. Similarly, you can also choose to invest toward the beginning of a long-term financial goal and then gradually switch to saving in order to cover yourself for any drop in the value of your investment.
In any case, a smart tool like the Doctor Money app can help you keep track of both your savings and investments. Download the app today and kick-start your financial journey with confidence and determination!