What are the best reasons to invest or save?
Let’s take a step back.
What is investing?
Investing is setting money aside and putting those funds into an investment vehicle with the expectation that it will generate a profit in the future. Since investing is putting money into funds (stocks, bonds, real estate, etc), depending on the fund, there will be some level of risk. This means that the value can and will change over time; including fluctuating up and down.
What is saving?
Saving is setting aside a portion of money and putting it into a savings account. Many banks offer savings accounts, and some of these accounts can vary from basic to high yield savings accounts. The notion is that by putting your money into a savings account, that money will be held until you either add or subtract from it.
This post is about the best reasons to invest or save.
Let’s dive into the top 5 best reasons to invest or save.
1. Understanding your financial goals
First and foremost, it’s so important to define and know what your financial goals are before investing. While investing is a great tool to build wealth, there are a lot of factors to consider before investing. Depending on what investing vehicle you put your money into, there could be various tax implications (think 401k, Roth IRA, HSA, FSA, etc). By tax implications, it means for each account, there are different rules you need to abide by. Which is why knowing your financial goals is the very first step. Are you trying to save for retirement, buy a home, fund your child’s education, build wealth, etc? Each of these will have their own time horizon; therefore, the strategy could be different for each.
Investing is great for achieving long-term goals. However, saving will be best suited for short-term goals. Saving is best for short-term goals because it is the least risky between the two options. You put $500 into a savings account, you’re more than likely to still see that same $500 the next day, week, year (unless you make any changes yourself, and unless the bank goes under, but that’s where FDIC insured comes into play).
2. Risk Tolerance and Time Horizon
This goes hand in hand with understanding your financial goals. Generally, the longer the time horizon, the more risk you can afford. For example, if you’re a fresh graduate and just entered the job market, you will have a long time before you retire. Therefore, your appetite for risk may be much higher than someone who’s nearing the end of their working career and is looking to retire in a few years.
3. Emergency Fund
Is your emergency fund fully funded? While figuring out what your financial goals are, it’s important to build up your emergency fund if you haven’t already done so. This can be anywhere between 3-6 months of fixed expenses. Think rent/mortgage, insurance, food, transportation, etc. Since your emergency fund needs to be highly accessible, and you want to maintain the value, it’s best to put this fund into a savings account. You want to be able to depend on that in the case of a job loss or otherwise sudden event that significantly impacts your financial situation.
4. Tax Efficiency
As stated above, investing has a lot of tax implications depending on which investment vehicle you choose. While some of these accounts can offer great tax advantages/benefits, pay close attention to the rules. For example, there are contribution limits to retirement accounts (401k, Roth IRA, etc). If you go over the contribution limits or don’t adhere to the rules, there may be penalties.
Saving, on the other hand, doesn’t have quite as many rules to abide by as there aren’t as many rules. Interest earned from high yield savings accounts are still considered income. However, any interest earned through a Health Savings Account will not be taxed, as that’s one of the tax advantages from an HSA. Again, some of the specific savings accounts offer tax advantages, but pay attention to what those rules are.
5. Reinvest Dividends or Interest
This is the best part to both investing or saving: the ability to reinvest dividends or interest, depending on whether you’re investing, saving, or doing both!
With investing, some funds will have dividend payouts periodically. You will be able to make this change in your settings, but you can choose whether the dividend payouts are paid to your account in cash or reinvested back into the fund.
With saving, the interest earned from your savings account will go back into your savings account. This way, the interest will be added to your savings amount; therefore, your savings will be compounded, increasing your base amount.
To reiterate, the top 5 best reasons to invest or save are:
- Understanding your financial goals
- Risk Tolerance and Time Horizon
- Emergency Fund
- Tax Efficiency
- Reinvest Dividends or Interest
There you have it! Interested in learning more about money saving tips? Check this post out for brilliant money saving tips!
Hey!
Interested in seeing more? Check out our Instagram, Pinterest, and Twitter below!
