Save or Invest? What Should I Do?

Don’t worry, this article will help you to figure out the solution to this most common problem, and will guide you on how to build up your savings and the most suitable ways of investing money.

First things first, how are the two different from each other?

Difference Between Investing and Saving

Making an investment or saving funds are basically two different concepts for financial planning. Let’s see how they are different from each other.

Investing: Investment meaning is taking a part of your funds and trying to multiply it by purchasing things or tools, which according to you will rise in value. For instance, you can invest in property, stocks, or shares, and expect returns on the same.

Savings: This means keeping money aside, gradually. Usually, you save up to the payment for something special, like a deposit on a home, a holiday, or for covering the emergencies, which may come up without any prior notice. Saving generally refers to putting your funds into cash or money products like a savings account of a bank or a cooperative society.

Do You Think You Are Prepared for Investing?

Whether it makes sense to invest for you or not is based on your objectives, especially when they are either short, medium, or long.

Short-Term Objectives

These goals are the things you plan on doing within the coming 5 years. For the short-term goals, the basic rule is to make savings in cash deposits such as bank accounts. The stock market keeps fluctuating in the short-term and if you make an investment for less than 5 years, you may end up in loss.

Medium-Term Objectives

These goals are the things that you plan on doing in the next five to ten years. For such objectives of investment, cash deposits may prove to be the most suitable. However, it is dependent on the amount of risk you are willing to take with your funds for achieving a higher return on your investment.

For instance, if you plan to purchase a property in say, the next 7 years, and you know you will need all of your savings as deposit and do not want to risk your funds, it may be safer to keep your funds in a savings account.

However, you must keep in mind that the savings you make will still be prone to inflation. This is how the interest that you earn on the money you saved fails to keep up with the inflation rate, hence reducing the purchasing power of your money.

On the other hand, in case you have more flexible needs, you may want to consider the importance of investment. But this should be done only if you are ready to take a risk with the original capital for trying to achieve a higher return than you would have earned on savings.

Long-Term Objectives

These are the objectives wherein you do not require the funds for 10 years or more. For such objectives, you should consider investments because inflation may seriously impact the value of your cash savings in such a time duration.

Over the long-term, the stock market can do better as compared to cash, giving an opportunity for greater returns on the funds invested over time.

You can reduce the risk level you take when you make an investment by spreading your funds in different investment types. This is known as diversification.

Should You Save or Not?

Here are a few things you should know about savings.

Building an Emergency Fund for Contingencies

Every person must put their maximum efforts into building up an emergency savings fund.

The basic rule is that you must have living expenses worth 3 months saved in savings account that you can access instantly. This must include school fees, food, rent, and other essential expenses.

The emergency fund would mean that you have at least some financial security in case something goes wrong.

Continue Saving

Now since you already have an emergency fund, saving a minimum of 10 percent of your earnings every month would be a good idea. If not, 10 percent, then at least as much as you can afford.

Make savings goals for yourself and keep aside enough amount for purchasing whatever you want. This amount can be used for weddings, a trip, or house deposit.

You can also plan to invest this money once you have saved enough.

When is Savings Not a Good Idea?

The only time when you must not save or invest your money is when you have even more important things lined up that require your funds. For instance, when you have to get your debt under control.

Invest or Save?

Here are a few financial objectives that are important in your lifetime. Let’s see whether you should invest or save for these hypothetical situations. This will help you in clearing your constant confusion about investing and saving.

Over to You!

The table above shows that you may have quite some financial goals in your lifetime, these are only a few of them.

All your financial goals or objectives may have varying timescales. This means you may want to start some savings and some investments well in time. Hence, planning them becomes very important, while whether to invest or to save is your decision.