Savings vs. Investments? Why not both?


savingIf you’re at that point where you’re asking yourself whether you should save or invest, chances are you probably have enough to do both. Here are some simple guidelines to help you save or invest with confidence.

The difference

Both saving and investing are good practices that ensure you have money set aside for your financial security. What’s the difference? Saving is setting aside money bit by bit towards a lump sum that you intend to use for a particular goal, such as a vacation, home improvement, or for emergency purposes. Some people do save without a particular goal in mind, but the more committed savers are those that do it with a purpose. Investing is taking some of your money and making it grow, by buying things that might increase in value, like stocks, property or shares in a fund.

No excuses

Everyone is encouraged to save, regardless of income. For those making barely enough for their daily needs, the coins left over from a trip to grocery always presents an opportunity to save. Cutting back on needless spending, such as smoking or eating out can always be done. There are, however, certain types of individuals that may be “exempted” from saving. Those trying to get existing debt under control are advised to take care of their debt problem first. Expenses for life insurance always take precedence over saving, because this provides your family with security.

Set monthly targets

When planning to save, and with or without a purchase goal in mind, it is good practice to target a specific percentage of your monthly income to set aside. 5% is a good figure to start with, and 10% the optimum percentage. Lately, this method has been dubbed “paying yourself first” but the principle is exactly the same. You only consider what’s left after you “pay yourself” as the amount of money you can play around with for your daily expenses and monthly bills.

Have a goal

A new car? Home improvement? A trip to Europe? As with saving, you should have specific goals when investing. Broadly, you should need to determine whether your goals are short, medium, or long term. Short term goals are things that you plan to do within the next 5 years, medium term goals are things you plan to in the 5-10 years, while long term goals are those that you plan to do 10 years from today and beyond. After evaluating your goals, you then decide on whether you need to save or invest to meet a specific goal.

Read more:  Stop Accrued Debt and Start a Debt-free Life in 5 Easy Steps

Short-term vs. Long-term

For short-term goals, the rule is to save into cash deposits. Investing for short term period may not help you meet your short term goal. The stock market, for example, may go up or down in the short term and if you invest for less than five years you might well make a loss. For longer-term goals, it’s often best to invest because inflation can seriously affect the value of cash savings over the medium and long term. The stock market tends to do better than cash over time. The longer you can leave your money, the more chance you have of making a profit. For the medium term, cash deposits may sometimes be the best answer, but it depends on how much inflation risk you are willing to take, and whether you need a certain sum on a certain date.

Some practical applications on whether to save or invest to meet goals:

  1. If you really need to replace your old car because your existing one is just about ready to break apart and you need one within the year, save for the down payment.
  2. You want to start a family and would like to move into a new home in three years. Save to put down a deposit on a new house.
  3. You plan to pay for your child’s wedding. If the child is still a young and 10-15 years away from getting married, invest the money. If the child is just a couple of years away from getting married, save.
  4. You’ve just turned 30 and you want to prepare for your retirement. Money you put aside for retirement should go into investments. Most people invest in a pension, but other investments can be suitable too.

Sources:

  1. US Securities and Exchange Commission: Differences Between Saving and Investing
  2. National Consumer Agency: Saving and Investing
  3. Prairie Eco-Thrifter: Should you save or invest?

What percentage of your monthly income do you set aside?
Are your savings and investment decisions goal-oriented?

Category: Personal Finance

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