You know you need to save money for emergencies, future expenses, and even retirement, but what’s the best way to do it? Should you put all of your money in savings? Should you invest some or all of your money? Should you combine the two?
No two people will have the same answers to these questions, as everyone has a different risk tolerance and goals. However, knowing the difference between saving and investing can help you decide what is right for you.
The Benefits of Saving Money
When you save money, you put it in a ‘safe’ account or an account that you can quickly access, such as a checking, savings, or money market account. When you save money, it’s there when you need it, which is great for short-term expenses as well as emergency funds. When you experience an emergency, you need the funds available now – you don’t want to have to wait to sell assets to get the funds and risk a potential loss.
Who Should Save Money?
Consider saving your money if you don’t have an emergency fund set up yet. Also consider it if you need the funds for something short-term, typically less than 2 years. You’ll want an account where you can access the funds without penalty and without the risk of loss. Make sure you shop around for the savings or money market account with the highest APYs as many savings accounts pay minimal interest.
The Benefits of Investing Money
When you invest money, you buy an asset in the hopes that it appreciates and you walk away with a profit. Investing is a long-term strategy. Don’t expect an investment to turn you a profit overnight, you’ll only be met with disappointment. Money that you invest should be money you don’t need anytime soon and that you can risk if you experience a complete loss.
Who Should Invest Money?
Don’t consider investing until you have an emergency fund set aside. Your emergency fund should have between 3 – 6 months of expenses in it. If you have a stocked emergency fund and you contribute to your 401K at work, then investing may be a good idea.
Combining Savings and Investments
Oftentimes, a combination of savings and investments is ideal using the following strategies:
- Always save first if you don’t have an emergency fund or it’s running low
- Always have enough in your liquid accounts to cover short-term goals
- Invest the money you won’t be in financial trouble without if you lose it
- Invest the money you can leave untouched for the long-term as investing is a long-term strategy
- Bulk up your savings when the economy worsens or you worry about your job stability
Knowing whether you should save or invest your money is important. They both play an important role in everyone’s life. Ideally, you should be able to save enough money to cover your emergencies while investing in your future. Investments should help with your retirement income or your long-term goals – the goals you want to achieve five or more years down the road.