So which is better – saving or investing?
Neither saving or investing is better in all circumstances, and the right choice
really depends on your current financial position.
Generally, though, you’ll want to follow these two rules of thumb:
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If you need the money within a year or so or you want to use the funds
as an emergency fund, a savings account or CD is your best bet.
If you don’t need the money for the next five years or more and can
withstand some losses in capital, then you likely should invest the
money.
Real-life examples are the best way to illustrate this, Keady says. For
example, paying your child’s college tuition in a few months should be in
savings — a savings account, money market account or a short-term CD (or a
CD that’s about to mature when it’s needed).
“Otherwise people will think, ‘Well, you know, I have a year and I’m buying a
house or something, maybe I should invest in the stock market,’” Keady says.
“That’s really gambling at that point, as opposed to saving.”
And it’s the same for an emergency fund, which should never be invested but
rather kept in savings.
“So if you have an illness, a job loss or whatever, you don’t have to resort
back to debt,” Hogan says. “You’ve got money you’ve intentionally set aside to
be a cushion between you and life.”
And when is investing better?
Investing is better for longer-term money — money you are trying to grow
more aggressively. Depending on your level of risk tolerance, investing in the
stock market, exchange-traded funds or mutual funds may be an option for
someone looking to invest.
When you are able to keep your money in investments longer, you give
yourself more time to ride out the inevitable ups and downs of the financial
markets. So, investing is an excellent choice when you have a long time
horizon (ideally many years) and won’t need to access the money anytime
soon.
“So if someone’s beginning with investing, I would encourage them to really
look at growth-stock mutual funds as a great starter way to get your foot in,”
Hogan says. “And really start to understand what’s going on and how money
can grow.”
While investing can be complex, there are easy ways to get started. The first
step is learning more about investing and why it could be the right step for
your financial future.
Learn more: