Save or Invest? Here’s How to Decide
Achieving financial security can be done by saving, investing, and other strategies. Saving involves putting money aside to use in the future. Investing is all about making your money work for you by buying assets that will grow over time.
Whether you’re saving or investing, both strategies have the same goal of having more money tomorrow than you had today. Though similar, saving and investing are extremely different.
Do you want to move further down the path of financial security? Here’s what you need to know when deciding whether to save or invest.
A Healthy Emergency Fund is a Must
Life is full of unexpected twists and turns, especially when it comes to money. Are you prepared to cover a major expense, such as car or house repair? Do you have a healthy financial safety net if you were to lose your job tomorrow?
If you aren’t prepared for an unexpected expense, it’s best to focus on saving. A healthy emergency fund should have enough money to cover at least three months of living expenses.
Having cash on hand helps you to overcome unexpected financial challenges.
Short-Term Goals? Focus on Saving
Before deciding whether to save or invest, think about your financial goals and how long it will take to achieve them.
- Are you looking to buy a home in the next few years?
- Need to save money for your upcoming wedding?
- Planning a luxury family vacation?
Each of these financial goals are short-term, which means its best to save versus invest. Once you’ve saved up all the funds you need to cover your short-term goals, you can (and should) consider investing.
Investing is for Long-Term Growth
Investing is best for long-term goals. People invest to fund their retirement and to provide financial security later in life.
At a minimum, you should expect to invest your money for at least five years. Investing is based on the stock market, which can be quite volatile. Investing for a shorter period of time means that you’re likely to face volatility and potential losses.
You don’t want to put yourself in a position where you invest money, but then need it for an emergency. In this scenario, you may have to sell your stocks and other assets at a loss.
Investing is risky by nature, but it’s even riskier when the timeline is short. Only invest if you can afford to keep the money invested. Otherwise, put money into savings accounts that boost your cash reserves.
When deciding whether to save or invest, consider the health of your emergency fund. If you don’t have an emergency fund that can cover 3-6 months’ worth of expenses, you should be solely focused on saving.
From there you can make a timeline to figure out which goals you need to save for and which ones to invest for.
By knowing when to save and when to invest, you can have peace of mind that you’re in a great financial situation. But don’t get too comfortable! Continue to make your money work for you by making sound financial decisions.