Should I Save or Invest My Money?
If you’re in the position where you have a little extra money every month it can be hard to decide what to do with it. There are a few common approaches to making your money grow, but the two that people tend to stick with are saving it or investing it – but which is right for you?
The Case for Saving
If you don’t have any savings at all, then you shouldn’t even be considering investing your money. The first thing you should look to do is set up a savings account that’s easy to access and start building up an emergency fund.
An emergency fund is a pot of savings designed to cover any short term major expenses in the event you suffer from a loss of income. As a general rule you should look to have around 3 months’ worth of essential expenses, such as food, rent and other household expenses saved before you consider your other savings options.
If you’ve established your emergency fund then it’s time to look at your other options. The plus side of saving over investing is the relative security. There’s almost no risk of losing your money, and you can usually get a fairly stable return on your money if you choose the right account.
If you decide to save instead of investing, make sure you’re saving for something rather than just putting money away for the sake of it. It could be for your retirement, to buy a new house or a new car, or simply to provide a little extra security for your family. Knowing that the money coming out of your account each month is going towards a bigger cause can make it easier to save regularly.
The Case for Investing
Investing can be a little more involved than saving, but there’s also the opportunity to earn a better return on your investment than with a savings account. As with savings, you need to decide why you’re investing and what your goals are before you put your money in.
If you’re saving to provide a regular annual return to help finance your retirement, chances are you’re looking for a lower risk, lower return investment. If you’re looking to grow your money substantially in a short period of time, you may opt for a riskier investment which could provide a higher ROI.
If you’re looking at the long term, typically 10 years or more, then investing tends to outperform cash savings. This will obviously depend on the state of the markets when you’re looking to withdraw your money, but in general the trend is a positive one.
With investing, particularly on the higher risk investments, there is a chance you could lose some (or all) of your money. This aspect can put people off, so most investors will recommend splitting your portfolio across a range of higher and lower risk investments to help minimise the risk of losing everything.
The decision to save or invest is ultimately a very personal one, based around your tolerance for risk and how much time and effort you’re willing to put in. If you have no savings at all then investing shouldn’t really be a consideration, at least in the short term, but once you have some cash in the bank it could be worth spreading your money around a little.