Savings vs Investments: What you should do next
What do you plan to do with your money?
Would you rather save or invest it?
Calculating your money goals, risk tolerance, and financial situation will help you determine what to choose.
Many of us liken money to vapor that fades into thin air, so we need to build a system that keeps or grows it.
Savings and Investments are systems that’ll help you keep or grow your money but you have to do them rightly. Robert G. Allen once asked. “How many millionaires do you know who have become wealthy by investing in savings accounts?”
Meaning, you must first know the difference between savings and investments.
What are savings and investments?
Savings
Saving money could be for different reasons like making purchases, emergencies, and the future.
Savings typically means money is available when needed and has a low risk of losing value.
Saving a specific amount with a target timeline is a simple way to achieve your goal. For example, you can achieve the target of $1200 in six months when you put away $200 every month.
Savings help you achieve financial independence, which allows you not to depend on your paycheck, the government, or people.
You can live debt free, buy a home or car, settle unforeseen expenses like emergencies, medical, etc. and even plan for retirement and your child’s education.
Investing
Investing is the art of multiplying money. It has the potential to generate high returns, but such a benefit comes with a risk.
The risk can be very high, and it can potentially wipe off all your money and put you in debt. That’s why it is crucial to invest wisely and with adequate knowledge.
Investing can be for reasons like reaching a financial goal, earning higher returns, or growing income.
Key difference
Saving and investing are quite different.
Savings have minimal risk of loss of funds but also have minimal gain, while Investments yield higher return compared to savings but has an increased risk.
Inflation could affect the value of your savings, but the investment is capital gain. For example, if you put $100,000 in the bank by January and the importance of the dollar drops by 2% by the end of the year, you’d have $98,000 left in the bank. That’s a loss.
But if you invest in a stock with $100,000 and the market price rises to $150,000 due to inflation, you’d have a return on your $50,000 profit just by putting your money somewhere.
The best part is when you put that amount in real estate rental, you’d keep earning passive income while others are losing their fortunes.
Savings are straightforward to access in cases of emergencies than investing.
What to prioritize?
The game of money is about your ability to double, triple, and multiply money. Your financial goals will determine how hard you need to play the game.
Circumstances or needs should determine whether you save or invest. For example, investing is unwise when planning to build a house because investment has a high-risk ratio. Rather than invest, it’s best to save under these circumstances than lose your money due to inadequate investment.
No man can boast of a 100% investment record, not even Warren Buffet; that’s why it’s essential to play it safe under these circumstances.
Your risk tolerance and time of access should determine your decision.
Long-term/short term
A short-term project like your daughter’s wedding or a car purchase within a stipulated period should make you save, not invest. Still, if a project has a long-term span, you can get into an investment with the hope that you’d recoup the money within time just in case you lose it.
Playing safe: savings and investing combo
Before investing, ensure you have a fund that covers up to three to six months of your expenses in savings.
This fund will serve you in cases of emergency and save you from debt in the face of unforeseen circumstances.
The reason is that you need a fund you can easily pull out in an emergency or have something to fall back on in case the investment goes south.
Bottom Line
Review your goals to figure out which option is best for you.Playing it safe by focusing on saving alone will cost you a lot of potential income, while playing investing may run you bankrupt if things go wrong. Choose wisely. This reason is why financial intelligence is necessary to make the right decision.
However, these principles help reduce the risk and better position you no matter your decision. Remember, timing determines your decision, but you should be able to combine the two to play it safe.
