When it comes to protecting your financial stability for retirement, you are bound to face a fork in the road when deciding how to secure your future funds. Most people will narrow the decision down to saving money in a bank account or investing it in the markets. The answer to this question depends on your individual financial goals for the future, as well as your current financial situation.
Over the course of time, a consistent saving regimen is more likely to benefit your finances when compared to complicated investments or strategies that rely on timing the market. For example, engaging in risk-the-farm investment strategies involves a higher probability of failure, compared to saving. So, which is better? Saving or investing?
Advantages of Saving
Bankrate points out that saving is the mechanism that makes investing work over time and increases the likelihood of success in accumulating wealth. An average saver who sets aside money with a disciplined, consistent approach is bound to outperform a great investor who doesn’t save. This is because setting aside money enables you to add more to an investment portfolio and allow compound interest to work with more funds to build upon.
Beyond that, saving is typically done for smaller, short-term goals that you want to reach soon. Examples include going on a lavish vacation or simply building up an emergency fund to cover things such as a broken furnace or unexpected medical bills.
Follow the Golden Rule
For those who wish to focus more intently on saving, the Golden Rule should be followed. If you haven’t heard of it, this involves setting aside enough money to cover three months’ worth of living expenses. This money should be in a savings account so it is liquid and can be used to cover housing, grocery, auto payments, and other essential bills.
How Much to Save vs. Invest?
While the Golden Rule is great, you should aim to save enough money in liquid funds to cover your expenses for up to six months, so you have time to transition in the event of loss of income. Investing should take a back seat to saving until you have reached that level to ensure that you can take the risk of investing without depleting your emergency fund.
How to Invest When You’re Ready*
Once you have your emergency fund in place, it’s time to invest. The question is, “how should I invest?”
Examples of popular investments:
- Mutual funds: investment programs funded by shareholders that trade in diversified holdings and are professionally managed.
- Stocks: a type of security that represents ownership in a corporation and a claim on part of the entity’s assets and earnings.
- Bonds: a debt investment in which you as an investor loan money to an entity (corporate or governmental) which uses the funds for a defined period at a variable, or fixed, interest rate.
- Real estate: you can invest directly in property or into real estate investment trusts (REITs). Real estate typically delivers a strong potential for increase over time, and you earn money when it is sold. However, selling can take time (unlike stocks) and there are costs associated with purchasing, selling, and holding real estate.
*These are examples of ways you can invest your money; Level Four Wealth Management is not suggesting you use any of these methods.
Are You Ready to Invest?
Whether you’re ready to invest or not comes down to the goals you’ve set for yourself. You may want to consider whether they are long- or short-term goals. Investopedia points out a general rule of thumb here is that goals under 7 years from today are considered short term, while those over 7 years are considered long term. Keep in mind that these are dependent upon the individual and not written in stone.
If you’re looking at short-term goals, one of the safest approaches is to save money in a bank account or CDs. Stock markets can fluctuate significantly, which may increase the likelihood for a loss if you can’t wait for long-term gains. Long-term goals, such as retirement funding, can be left to investments that can compound interest to have the chance to build greater wealth.
Connections Financial Advisors may be able to help you assess your current financial situation and help you through the decision-making process as you compare the viability of saving or investing your money.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing in stocks or mutual funds involves risk, including the risk of loss. No strategy or asset allocation assures a profit or protects against loss.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
Certificates of Deposit are FDIC insured and offer a fixed rate of return if held to maturity. Investment alternatives involve risk, may fluctuate with market conditions, and upon sale may be worth more or less than the original cost.
The rule of 72 is a mathematical concept and does not guarantee investment results nor functions as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.