Should I Be Saving or Investing

Which is Best? Saving vs. Investing

This is a hard question to answer, there is no one-size-fits-all solution because everyone has a different financial situation and varying goals. But, it is fair to say that everyone should be tucking some money away right not to have access to more funds in the future. If you’ve ever wondered whether you should be saving or investing, this is the article for you. We will explore both strategies and offer some advice on how to choose the best approach to meet your needs. 

A Basic Primer

Financial experts tend to agree that saving is a short-term strategy and investing is better for long-term gains. Most of us need at least some savings to deal with unexpected financial problems that have the potential to ruin our finances. Some prime examples include an unforeseen medical bill, a car repair, a job loss or something else. The best way to think of investing is that it’s a longer term strategy to grow your wealth. The money that’s invested isn’t for short-term emergencies or to pay for a vacation. As you can see, these two approaches are very different, but that doesn’t mean that you can do both at the same time.

Cash Savings

These savings are required for people that need their money immediately or within five years. Using a standard savings account they won’t grow or fall in value, but they are not entirely risk free. The problem is inflation, cash loses purchasing power as prices rise and in that way they do indirectly degrade in value in real terms. That said, there are three common scenarios where cash savings can help. They are:

• You need ready access to more cash than you keep on hand for personal or business use.

• You want to create an emergency fund to cover unexpected problems that could wreck your finances (more on this below). 

• You have a clear short-term goal, such as: a wedding, a deposit on a home, a dream vacation or something else. 

Most experts agree that an emergency fund should be a prerequisite to investing to ensure that the investor doesn’t need to dip into their funds. Taking funds out of a long-term investment may be impossible and/or it could incur a hefty fee. To build an emergency fund, add up all your monthly expenses and multiply that sum by the number of months you want. Having a 3-6 month emergency fund is empowering, it can give you confidence that you’re covered if the unexpected occurs and free up funds for investing. 

Investing

This should be money that you won’t need for five or even ten years. A smart investor will spread these funds into different areas to mitigate risk and grow money over the long-term. This is not as secure as cash, the investments could rise or fall, but there is the potential to grow your wealth significantly. There are some common ways to invest money. They are:

• Shares: This is where you purchase part of a company that’s traded on the stock exchange. Essentially you’re making an educated bet that the company value will rise and at that point you can choose to hang onto them or sell them.

• Property: This can be residential or commercial property that is built, upgraded, bought, sold or rented to meet market demand. This is often referred to as real estate and traditionally it has been a reliable investment.

• Bonds: These are issued by governments or companies to raise finances. Essentially you’re paying some of their debt and in exchange you may get an interest payment when the term of the bond ends.

• Funds: Some investors use a fund manager that invests their money for them in accordance with their specific objectives. The purpose of the fund may vary, it could be used to produce an income or to grow wealth over time or it could be a combination of the two. A fee is paid to own a “unit” with the fund, this is exchanged for the time and expertise of the fund manager. 

The best time to invest is when you are in a position where you can accept a certain level of financial risk. Remember that you shouldn’t be accessing that money for at least five years or even longer. There are no guarantees, you may get back less than you invested, but there is the potential for growth that you cannot get with cash savings. 

Which is the Best Approach? 

If you don’t have an emergency fund to cover rainy day expenses you shouldn’t consider investing. Aim for 3-6 months of essential expenses if you’re working and raise this to 3 or more years if you’re retired. This should cover a layoff, health problems or most other unexpected circumstances. Next, if you’re thinking about investing you should consider any short-term goals that lie beyond the purpose of the emergency fund. This would be travel plans, a deposit on a home, big tickets items and other purchases. You could delay investing to save for these items or save for them alongside investing which may delay the purchase.  If you’re not on track to reach your retirement goals, you should consider investing. But, you need to understand the risks, you may be unable to access those funds until you’re 59 1⁄2 without taxes and incur a penalty in addition to a volatility risk. Starting early and leaving the funds in place is vital to take full advantage of compounding for growth. Those that are not prone to impulse purchasing and sound financial judgment can invest and save at the same time. Take the funds that you have and split them according to your needs to enjoy life, build your emergency fund and continue to invest. 

This article is not a substitution for professional financial advice. Remember that you can lose money when you invest and you need to ensure that this doesn’t wreak havoc on your finances. Start small, build your emergency fund and continue to save with some money set aside for investing. Dip your toe in micro-investing to get a feel for shares, property and more before you make a major financial commitment.