Most of us are taught the advantages of saving money from a young age, but is just saving money enough? As you grow older, you’ll have larger financial decisions to consider, like buying a house or a car. While the returns of investing are higher than leaving your money in a savings account, it’s also riskier. This is why people often hesitate to start investing. Depending on your short and long term goals, here’s how to save and invest money wisely.
Saving vs. Investing
Saving means to put your money aside in a relatively risk-free bank account. This is money in savings accounts that can be accessed easily when needed. People often save up for a future expense or a need.
Investing, on the other hand, involves using your money to buy an asset that will generate higher returns, but with more risks involved. Some forms of investments include stocks, mutual funds, real estate, shares and more. Most people who invest do so in order to grow their money and achieve long-term financial goals.
Deciding between saving and investing
Both saving and investment have their own benefits. Most people often start off with saving first, as a safety net, in the case of unexpected expenses or loss of income. Your savings or “emergency fund” should cover at least 3 to 6 months of your expenses to avoid the stress of financial troubles. The general rule is to save a minimum of 10% of your salary or as much as you can afford in order to achieve financial security.
Once you’re financially stable and have a comfortable amount of money saved up in your bank account, you can consider investing. Before putting your money into an investment, it’s important to consider your financial goals. Oftentimes, your funds have to remain in an investment plan for 3-5 years, depending on the type of investment you choose.
The advantage of investments is that it generates higher returns compared to leaving your money in a bank account. With inflation, sometimes just putting money aside is not enough. However, it’s important to note that there are higher risks involved when it comes to investing and you may end up losing money if you’re not careful. The higher the returns, the higher the risks involved. Hence, this is why you should only invest money that you may not need in the foreseeable future.
So, which is better?
A combination of saving and investing works best. First, work towards securing a healthy amount of savings in your bank account. Then, start investing to give your money more opportunities to grow. At the end of the day, how much money you decide to put into your savings or investment will depend on your goals and risk tolerance.
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