When Is It Better to Save Than to Invest?
Even if you live on a tight budget, it’s always a good idea to set aside some money for the future. But even as you build your emergency fund , you may wonder if your money would serve you better if you invested it. Whether you’re planning a vacation next year or retiring in thirty years, it’s always tricky to know exactly where your money should go. Here’s what you need to know about choosing savings over investments, depending on your financial goals.
When to Prioritize Savings
The temptation to invest over saving is a bit like financial FOMO, especially when the stock market’s average return seems much more profitable than a so-called “high-yield” savings account. ( Business Insider covers exactly this mystery well.) However, before choosing stocks over savings, carefully consider the schedule for using your funds.
Prioritize savings if you expect your money to be needed at any time within the next five years. Maybe you’re aiming for a vacation or a down payment on a house, or maybe you need to top up your emergency fund. (For reference, the “starter” emergency fund is about one month’s rent plus your insurance deductible. From here, assuming you’ve paid off all high-interest debt, you should continue to create an emergency fund that can cover you for six months. or longer.)
It comes down to remembering that savings accounts are more affordable and less risky than investing. Of course, lower risk may sound like “lower reward,” but more importantly, it means you won’t lose money on savings (if you don’t factor in the potential loss due to inflation). Here is our guide to choosing a high yield savings account .
When to prioritize investing
If you already have a comfortable reserve fund, the dream is to have your investment plan match your savings plan. While savings accounts are a short-term option, you can look to investing to meet your long-term goals, such as saving money for retirement or paying for your kids’ college.
The key is not to choose investments over savings just because of short-term financial FOMO. For example, if you are tempted to redirect your savings into stocks because you are planning a big vacation in a few months and feel that the current quasi-crisis market has bottomed out, then it would be unwise to invest in stocks. growth stocks with a maturity of at least five years.
bottom line
Even when the interest rates in your savings account are low (and they are now rising ), it still doesn’t make sense to redirect that money into stocks if you plan on using it anytime over the next five years. Reassess your financial goals and don’t make the mistake of investing short-term funds in long-term savings.