It can be difficult to pick between investing your surplus income and saving it. This is true for people that have just started working on their finances and those that have been investing for years. Ultimately, you need to decide the best course of action that will help you attain your financial goals. This can be through saving tools, investing options, or a combination of both.
Saving vs. Investing
Saving is generally regarded the safer route since your deposits do not decrease unless you make a withdrawal. This cannot be said for investments that depend on market fluctuations. Your stock option may go up today only to decline tomorrow.
However, savings will not allow your money to grow as you would like. In some cases, the interest offered barely matches the inflation rate.
This means that money parked in savings options tend to lose purchasing power over a longer period of time. Investing is a great option when you want to beat inflation and receive higher returns. However, you should know that investments are subject to market risks and you may not always get the return you hoped for. Sometimes, investments end up being worthless after a market crash.
Pros and Cons of Savings
There are several advantages of parking your money in a savings tool, such as savings accounts, savings bonds, certificates of deposits, or money market accounts. The biggest advantage is that there is no immediate risk to your dollar amount in the savings option.
Your money won’t reduce as long as you don’t make a withdrawal. You can reach your goals in time with minimal risk. You can also plan your finances better since you know exactly the kind of money you need to save each month to hit the goal.
However, that doesn’t mean that savings is not without its drawbacks. For instance, your money may not increase in value at par with the inflation rate. Basically, the amount of money you have parked in your savings option may lose value each year even if the dollar amount is not reduced.
Another downside to this is a decrease in purchasing power which may be possible in 2021 if there are more tax cuts but this is another topic. You need to set aside a higher percentage of your income each month than what you would need to if you got higher returns by investing.
Pros and Cons of Investing
Investing is an excellent option if you want to save money and see it grow. However, you need to be ready to bear the risks of market fluctuations. The potential of interest in investing is far greater than savings. Whether you invest in traditional stock options or use smart options, like investing apps and robo-advisors, you could stand to receive higher returns.
Another benefit of investing is that returns generally compound. This means that your investment earnings are put to work earning more money for you. You may enjoy better purchasing power since you won’t have to set aside nearly as much as you would need to do in the case of savings.
However, investing is not always the right option. You could find yourself in a financial bind if the investment rates bottom out right before you need the money. You may need to put off your plans for a better market day in such a scenario.
Follow Your Goals
It can be difficult deciding whether to invest or save. You should start by determining your goals before you decide. Goals are usually short term or long term and require being planned for differently.
1. Save for short term goals
You should not hesitate to open a savings account or purchase a CD if you want money by a certain date. There is zero risk of your money amount decreasing in this option.
2. Investing works in the long term
Investments tend to grow better and offer higher returns. You should consider investing if you don’t need the money by a specific date and are flexible in your approach. You should choose this option only if can afford to delay your monetary need by a few years in case the market takes a downward turn.
3. Comprehensive approach
You can follow a customized plan that combines investing with saving. You can divide any surplus cash you have each month in savings for short term goals and investments for the rest.