Should you save or invest? Both saving and investing have their own place in a well-planned financial strategy. Which one you choose to pursue at any point in your life depends on both your goals and your current circumstances.
Even if you’ve been saving for a while, at some point you should have enough money stockpiled to test the market.
Here’s the how, when and why of both options and how to decide which one is right for you.
Choosing the right time
Ideally, it should never be a choice between one or the other. Done well, saving and investing can both get you closer to your goals in different but connected ways.
When to save
In all cases, saving money should always come before investing. Until you have an emergency fund in place, 100% of any money you put aside should go straight into a savings account. Savings will get you through tough times and make sure you don’t incur debt if you suddenly lose your job.
Experts say you should have three months’ worth of living expenses saved in an emergency fund, though more would be better if you have big monthly expenses.
Other times when saving is most important:
- If you’re about to lose your job and want a bigger emergency fund.
- When you’re pregnant. Babies are expensive and it doesn’t hurt to be prepared.
- If you expect to need a large amount of money within a short period of time (five years or less). Examples include a down payment for a house, paying for an expensive wedding or university tuition, or covering the cost of a major holiday.
- If you own a business. You should continue saving even after you start investing. Liquid assets – like cash in the bank – will allow you to take advantage of investment opportunities as they come up.
When to invest
For long-term goals, investing is a better strategy as it pays better, according to The Money Advice Service.
The right time to invest:
- As soon as possible after you have your emergency fund in place. If you plan to save for your retirement, the earlier you start, the better. Start investing at 20 and you could be a millionaire long before retirement age, but wait until you’re 40 and your chances of reaching that amount are much lower.
- If you’re committed to investing your money and not touching it for at least five years. Ten years is even better.
- If you can weather the ups and downs of the market. Investing is always risky. The market usually goes back up even after the worst recession, but it can take some time for that to happen.
What percentage of my portfolio should be in cash?
There’s no one-size-fits-all when it comes to the best saving and investing strategy.
According to Investopedia, you should be saving between 10% and 15% of your annual income. But if your goals are big, you might need to save a lot more than that. And if those goals are long term, you should be investing rather than saving.
This is because the average savings account has interest rates of 1% or less, but the average annual rate of return in the stock market is 6.5%. So the more ambitious your financial plans are, the more reasons to invest rather than save.
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