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Insight & Analysis - March 1, 2022

How to Know When to Save or Invest

It’s critical to keep track of your savings, assigning a deadline, or schedule, and a monetary value to your objectives.

There is no general solution to the question of whether to save or invest. What you want, when you want it, and how much you can afford, contributes tremendously to play a role.

It’s a good idea to look at a few key variables to see if you should save or invest your money based on your circumstances.

Due to the longer time frame to recuperate from stock market swings, one would typically choose to invest their money for long-term financial goals like retirement.

However, if your financial aim is short-term like five years or less, as it normally is for vacation goals, investing your money is usually not a good idea.

It will be better to put off the money in a high-yield savings account in these situations because you won’t have much time to recover from a significant slump. Risk tolerance and general financial health play a role in this decision.

Saving

We set aside money for purchases and unexpected expenses. Saving money usually means that it will be there when we need it and will not depreciate in value. 

It’s critical to keep track of your savings, assigning a deadline, or schedule, and a monetary value to your objectives. For example, if you want to save $3,000 for your yearly family vacation, you could set a goal of saving $3,000 in nine months and withdrawing it at the end of the year.

You’ll know how much you’ll need, how much you should save each month, and whether you’ll be able to take the money out without incurring costs to spend on that much-anticipated holiday.

Investing

When it comes to investing, it’s critical to do it carefully. If you start investing early, you will get a better return. Understanding the various investment vehicles, what they are used for, and how to use them is critical to your success. We put money aside for long-term goals like retirement. We employ specific vehicles that enable us to expand.

If you plan on retiring at the age of 50, and you are presently in your 30s, you have at least eleven years minimum before retiring. 

When your retirement starts, these will allow for withdrawals. Long-term retirement planning can assist you in achieving that objective.

The Pros and Cons of Investing and Saving

Pros

Investing: Due to a longer time horizon, your money will grow and also add in compounding interest.

Savings: Because your money is liquid, you can access it anytime you need it without penalty.

Savings: You are not affected by market fluctuations while you save.

Cons

Investing: Markets are inherently risky, and investments can lose value.

Investing: Withdrawing money too soon may result in a penalty.

Savings: You’ll miss out on market gains and a significant amount of compound interest if you save.

Is it Better to Invest or Save money?

The answer is entirely dependent on your risk tolerance, financial needs, and the time frame in which you need to access the funds.

Investing has the potential to yield substantially better returns than savings accounts, but this benefit comes at the cost of risk, especially over shorter time periods.

If you’re putting money aside for a short-term purpose and will need the money soon, you’re usually better off keeping it in a savings account.

On the other hand, if your aims are longer-term, you’ll usually discover that investing produces better outcomes. 

Why Is it Riskier To Invest Money Than to Save Money?

When you invest, there is usually no insurance or any backing to guarantee you of your money. All you will be seeking is a greater reward in exchange for the chance of not getting all back.

Of course, not all investments are created equal. Some have bigger potential returns and risks, while others are less volatile, with a reduced danger of losing money and a lower possible payoff. The greater the risk, the greater the potential return.

READ ALSO: Women are Better Investors, but Retire with 30-40% Less Money Than Men

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