Learn More About Investing and Saving Money Before You Make a Decision
Any individual who works a part-time or full-time job is likely to receive advice from their loved ones about what to do with their money once they receive a paycheck. Some people will suggest they save cash to cover 3-6 months’ of living expenses. Others will tell them to invest their money in an asset to grow their wealth over time. If you are wondering if you should be investing or saving your money, the answer to your question will ultimately depend on your preferences. However, it’s best to study these two concepts further to help you make an informed decision about what to do with your income!
If you have heard these terms before, then you may be familiar with how both saving and investing help you rack up money in a bank account. But what exactly are the differences between them? Well, saving cash is typically used for short-term and immediate expenses that require your attention, such as rent, food, utility bills, and transportation. The end goal of saving is to accumulate enough funds to create a stable financial future, but the “readily available” nature of this concept means you can use that cash to pay for any unexpected expenses.
On the other hand, investing is a commitment of your cash to different assets that can provide monetary rewards, but carry a very high risk. You can allow yourself to withdraw funds from your investment account, but the point of this approach is to build your money for a long time to meet your financial goals. While there’s a big risk when it comes to investing, you can potentially earn plenty of cash if you are savvy with your investments. You may have to research strategies online to become efficient in this field, but you may be surprised as to how much you can earn if you are successful with an investment.
If you are still unclear about what method you should take with your finances, you should think about what your priorities are in life. If you plan to save cash but focus on your expenses, then saving money is your best approach. However, if you want to grow your wealth while covering your essential costs, then investing in assets might be a sound idea.
Keep reading to learn some pivotal factors about investing or saving money that can aid you in making a definitive choice.
What Do I Need to Know About Investing or Saving Money?
While investing and saving money share similar functions, they each have distinct features that are important for you to be aware of. If you learn the pros and cons of both financial concepts, you will have a better idea of your personal goals and which method will grant you the opportunity of achieving those objectives.
The Advantages and Disadvantages of Investing Money
Investing your money in different assets such as stocks, bonds, mutual funds or certificates of deposits (CDs) can be a good way of creating wealth if done right. However, the major disadvantage of this approach is that you may face the loss of some or all of the amount that you put in place if the market declines.
If you’re considering accumulating funds over time, then consider the following characteristics associated with investing:
Advantages
- Steady Income Opportunities: Like most people, you might be earning your income from your part-time or full-time job. However, employers typically deduct an employee’s paycheck to manage taxes, so you do not get the total net pay. If you choose to get your employer’s 401(k) plan then you might get less money than what you were expecting. Thankfully, you can sustain a steady flow of income by investing your money into an asset! If you put your cash in several investments, you will have a higher probability of making a good return.
- Low Tax Rates: Another drawback of placing your money into your savings account is that you will have to worry about interest income payments. However, if the money you invest is in a non-registered account, then any gains you make from your asset will be taxed at a rather low rate.
- Earn Money While Fighting Inflation: Every single person has had to face the adverse effects of inflation when going shopping and seeing how things are costly. Whether you are earning a lot or a little, the cost of products may be consuming a large part of your salary, leaving little or no room to save. Thankfully, you have the potential to fight inflation when the returns on your investment are higher than inflation rates. If you diversify your portfolio, you can reduce the likelihood of inflation rates overtaking your earnings.
Disadvantages
- Potential Losses: Making an investment comes with the added risk of losing money if your asset decreases in value. The level of severity will differ with each investment, but high returns such as stocks and equity mutual funds typically have high risks. However, you can reduce your chances of losing cash if you diversify your investments and take the dollar-cost averaging method.
- Long Time Windows: Since investments are made to build your wealth for the future, that means you will have to hold a long time before you can access those funds. Plus, it may take a while to get some returns on your investment, so you will have to be patient.
- Market Volatility: Unfortunately, some investment vehicles can be volatile when the market fluctuates rapidly. The losses associated with this volatility can vary, but you must be conscious about where to invest and the possibilities of dealing with a changeful asset.
The Advantages and Disadvantages of Saving Money
If you deposit money into a savings account, you might work with a safer way of creating a stable economic outlook. Although it’s possible to accumulate cash for long-term goals, this method focuses primarily on short-term objectives, like covering your living expenses.
Take a look at some key factors to consider about saving money:
Advantages
- Ability to Pay for Unexpected Expenses: There’s nothing more inconvenient than dealing with an unforeseen bill that throws your budget out of whack. However, by sparing cash in your savings account, you will have the funds to repay those pesky expenses and keep yourself afloat. If your budget can’t afford an expensive expense, don’t worry. You can always apply for a personal loan or a title loan and handle your financial situation.
- Minimal Risks: Saving money into an account doesn’t have the same level of risks associated with investing. The Federal Deposit Insurance Corporation (FDIC) ensures up to $250,000 per depositor and other factors, so you won’t lose any money when saving if you meet the FDIC requirements.
- Groundwork for Retirement: Who wouldn’t want to live a comfortable retirement after working hard for so many years? If you contribute consistently to your 401(k) or IRA, you can rest assured you will achieve that important objective in your life!
Disadvantages
- Minimal Returns: While saving money is beneficial in building your wealth, you may not receive as many returns as you could with an investment. That might not sound like a problem now, but your money can lose value with inflation and put you in a challenging situation.
- Potential Fees: Depending on your chosen bank, you may have to cover some service fees, like making a transaction or withdrawing a specific total each month. If you don’t follow an effective budget plan, these charges could slowly reduce your savings after a while.
- Pay for Interest Taxes: As you might have read previously, you will have to pay an income tax for saving money in your account. The amount you will have to pay will depend on your income, but you may have to cover anywhere from 10% to 37% on savings interest.
After reading the various perks and drawbacks of investing and saving, you can now establish your financial roadmap and decide which strategy works for your objectives. Speak with a financial advisor online if you want an expert’s opinion on this topic and what you can do to fulfill your monetary motives.
Conclusion ⎼⎼ Consider Investing and Saving Your Money Simultaneously
As you can see, the approach you will take with your finances will depend on your personal objectives. However, many experts suggest that you create a financial plan that includes both investing and saving as it can help you accomplish your short-term goals, cover unexpected expenses, and grow your wealth for a stable economic future.
Don’t forget to contact a financial advisor today if you need guidance on what to do with your money.
