Whether you’re still in high school or on your way to retirement, you need to put some of your money into savings and some of it into investments if you want it to last. Although it can be difficult to choose between the two since each has its advantages and disadvantages, which vary from one person to another and from one situation to another.
In this article, we’ll explore the pros and cons of investing vs saving so that you can decide which approach works best for you and your financial goals at present.
What does investing mean?
When you invest, you’re essentially putting your money into something with the hopes that it will grow. This can be done in several ways, from buying stocks to investing in real estate. The key is to find an investment that you’re comfortable with and that has the potential to make you money.
For example, if you’re looking for a safer option and don’t have much experience with investments, then choosing stocks might not be the best idea.
What does saving mean?
When you save money, you’re setting aside cash that you don’t plan on using in the immediate future. This could be for short-term goals, like an emergency fund
The key is to not touch the money until you need it. That way, you can take advantage of compounding interest (increases over time) and get back all your initial investment plus a profit.
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Understanding compound interest
When you save money, it goes into your savings account and earns interest. The interest is typically very low, around 1% or less. When you invest money, it goes into stocks, bonds, or other investments that have the potential to earn a higher return.
However, there is also the potential to lose money when you invest. Compound interest is when you earn interest on your original investment plus any interest that has been earned in the past. This can help you grow your money faster than if you were just earning interest on your original investment.
How you save makes a difference
When you save money, you’re typically doing so, with the intention of using that money at some point in the future. Whether it’s for a rainy day fund or a specific goal. Saving allows you to have money set aside for when you need it. Investing, on the other hand, is all about growing your money.
You’re not necessarily saving to use that money right away, but rather letting it grow so that you can reap the rewards down the road. Both investing and saving have their pros and cons, so it’s important to understand both before deciding what’s best for you.
Read More: Retirement vs Pension: Know the difference
Save first, then invest
When you’re trying to grow your money, it’s important to think about the long term. That’s why, in general, it’s a good idea to save first, then invest. By saving first, you make sure you have a cushion in case of emergencies.
And by investing, you can take advantage of compounding. – Which is when your earnings grow exponentially over time. The downside? Risk. With investments, there’s always a chance that you could lose some or all of your initial investment if you don’t pick the right stocks, bonds, or funds to buy.
Comparing Investing with Saving
When it comes to financial planning, there are two schools of thought – save first, then invest; or invest first, then save. So, which is the better strategy? It depends on your goals and circumstances. The best option for you will depend on your level of risk tolerance and what you’re saving for.
A common belief among investors is that they should buy when prices are low to reap the benefits of a market rebound later on. But many people who invested before 2008 found themselves out of luck when the recession hit and stocks plummeted.
Also Read: what is an emergency fund for? Learn More
For those who have more cash than they need in their bank account, investing may be a good idea if they don’t want to worry about where their money will go every month.
On the other hand, if you have little money left over after living expenses each month but still want a retirement fund that builds up steadily over time, savings might be better for you until your financial situation improves.
Final Thoughts on Investing versus Saving
There is no easy answer when it comes to investing versus saving. It depends on your circumstances, goals, and risk tolerance. However, as a general rule, you should always have some money saved for emergencies
Investing can be a great way to grow your money, but it does come with some risks. Make sure you do your research and understand the risks before you invest any money.
Be aware that investments don’t always go up in value. If this happens, there are two options: wait until the investment recovers or sell the investment at a loss. You may also want to talk to an advisor about whether investing or saving would be best for you specifically.