Should You Invest Your Money or Save it?

Invest Your Money

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.

Factors You Should Consider Before Taking Out a Personal Loan

Personal Loan

Taking out a personal loan can save the day for many. With debt levels rising significantly and emergency savings not always being available, more and more people are turning to personal loans when they are in a pickle.

Maybe you are considering getting a loan to consolidate your credit card debt, pay for emergency medical bills, or even start a small business.

And since almost every lender in the country is now offering personal loans, you can compare the offers and choose the best deal. A 0.25% difference in interest rate might not seem a big deal but it can help you save hundreds of dollars.

So, in this post, we have put together a list of key factors you need to keep in mind when choosing a personal loan.

Are You Okay With Paying High Interest Rates?

If you’re considering taking out a personal loan, interest rate is one of the most important things to think about.

Interest rate means the percentage of interest charged by the bank (lender) on the principal amount. You can either choose a variable interest rate loan or a fixed interest rate loan, depending on your preference.

If you take out a fixed interest loan, the bank will charge the same amount of interest throughout the course of your loan regardless of the market situation. In other words, your monthly installments will remain the same come the Wuhan virus or high water.

If your credit utilization ratio, debt-to-income ratio, and credit score are all good you can easily qualify for a lower rate of interest with most banks.

On the other hand, if you take out a variable interest loan, your bank can decrease or increase the rate of interest according to market changes. This means your monthly installments can also go up or down from time to time.

That being said, interest rates on personal loans are generally higher than, say, a mortgage loan. This is because a personal loan is unsecured and you have no physical asset to back it up. You don’t have to put any collateral up which increases bank’s risk.

Do You Have A Good Credit Score (And Credit History)?

Since a personal loan doesn’t involve any collateral, your credit score must be in good standing. A bad credit score will mean that the lender can significantly increase your interest rate. They do this to cover your risk of default.

So, if you’re considering a personal loan, pay attention to your credit score and try to improve it.

Do You know the Exact Terms of the Loan Including APR and Hidden Fees?

Before you sign the papers, make sure you completely understand the terms of your personal loan. You must know the total cost you will pay for the loan as well as all the fees you could/will incur throughout the loan.

APR or the annual percentage rate is the total cost of a personal loan and it’s applied on an annual basis. It includes the loan origination fees, interest, application fees, and several other charges which thankfully are not as debilitating in a low tax environment which we are in now.

Here is a quick rundown of some of the typical charges that aren’t always openly discussed when you apply for a loan:

Loan processing or origination fee: This is when the bank charges you to process your application. Some loan providers will charge you to process your personal loan application. For example, some banks charge 1% of the loan’s value as the processing fee.

We recommend you avoid all loans that come with a processing or origination fees – or ask the bank to waive it if possible.

Late payment fee: If you make your payment even a day late, most lenders will charge you a late payment fee. But this can really hurt your credit score so be very careful with your monthly payments. In some cases, you can ask the lender to waive this fee as a one-time courtesy.

Prepayment penalty: If you pay your personal loan early, then your lender may charge a prepayment penalty. Lenders use this tactic to get the full amount of interest from those who have taken out the loan. So, make sure you choose a loan that has no such penalty.

Failed payment fee: If you don’t have the money in your account to cover a payment you’ve made, some banks will charge you for it.

The Bottom Line

The decision of taking out a loan is a big financial responsibility and shouldn’t be taken lightly. Knowing about the above factors will help you choose the right lender with the most flexible terms. And remember, you can negotiate with lenders for more favorable terms – and you should, especially if you have a respectable credit score.