Saving vs. Investing: How to Make a Smart Choice
Savings Vs. Investing: How to Make a Smart Choice
Choosing when to save and when to invest can help you take control of your money. Should you put your money in a savings account or invest it? Are savings and investing the same thing? Some people think so, but it's the differences that are key. This article can help you decide whether you should focus on saving or start investing to reach your financial goals.
Saving vs. Investing: What’s the Difference?
While both involve money, there are key differences between saving and investing. Saving means putting away funds in a safe place, like a bank account, for future use. Investing involves taking some risk and buying assets that will increase in value over time and provide more money – called returns – in the form of income or capital gains.
When to Save
Financial advisors recommend your top priority should be having a financial cushion for emergencies.
Emergency Fund: Many people lack funds for unexpected expenses like car repairs or medical bills. Setting up an emergency fund can make you more financially secure and give you much-needed peace of mind. It's wise to set aside at least three to six months' worth of living expenses in an interest-bearing savings account. Every little bit helps - even $500 can come in handy in an emergency. You can then put aside a little cash each month to further prepare for an unexpected expense.
Short-Term Savings: After you've fed your emergency fund, saving is a smart move if you need the cash within five years for a specific purpose, such as:
- A car down payment
- Home repairs
- Even a vacation
Keep short-term savings in secure options like savings accounts, money market accounts, or CDs for guaranteed returns, and avoid stock market investments. Consider CDs with staggered maturity dates for continuous access without penalties.
When to Invest
- Your emergency fund is in good shape: You'll want to have at least three to six months' worth of living expenses set aside.
- You've paid off high-interest debt: Credit card debt can really hamper your ability to save and invest. Knocking down that debt can free up money you can put to better use.
- You're thinking about retirement: Everyone wants enough to retire comfortably, and the sooner you start building your retirement fund – through an employer-sponsored 401(k) or IRA – the bigger your nest egg will be.
- You want to build a college fund: If you have young children and want to save for their college education, you can invest in a tax-deferred 529 education savings plan or a Coverdell education savings account (ESA).
Savings or Investing: Which is Better?
The bottom line is that saving and investing each have their benefits and drawbacks. Finding the right balance is key to a successful strategy. The good news is that it's possible to save AND invest at the same time.
Don’t Neglect Your 401(k)
While you're feeding your emergency fund, make sure that you're on track and contributing enough to your retirement plan, such as a 401(k) through your employer. If they're offered, take advantage of any employer matching options, which can help grow your savings. If you don't have a retirement plan through your company, think about traditional or Roth IRAs. When it comes to saving for retirement, the earlier you start, the more your fund can grow.
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