When you have enough money to cover your everyday expenses, you should consider saving money for the future. You can choose to put this money in a secure savings account with your financial institution or invest it in the market. There are risks and benefits of each that you should consider before making your final choice.
You might have had a savings account at your preferred lending institution since you were a child, or maybe you currently do business with one you chose yourself. Either way, this institution has dedicated savings accounts that are prefect for storing money and earning interest. Between investing and saving, the latter is the safer option.
If you don’t have enough money to cover your living expenses for up to six months, Joshua Kennon of The Balance says that you should only be considering savings. An emergency fund is essential for staying on your feet if you were to have a sudden illness or lose your job. He also points out that not living paycheck to paycheck will help alleviate pressure and stress in your life.
Beyond an emergency fund, you should not invest any cash you’ll need within five years, according to Alice Holbrook of NerdWallet. A savings account is a great place to hold money for big purchases, such as your next car or the down payment on a house. It will be much more accessible there than if you have it tied up in investments.
Investing your money can be thrilling, and there is a lot of potential to grow your money this way. Lauren Welch of Investopedia points out that the main difference between savings and investing is risk. Your money can only stay the same or grow in a savings account; but in investments, there is a very real risk that you might lose money. Yet, if you or your advisor make the right choices, you could increase your funds much faster than at a financial institution.
Investing is a long-term strategy for managing your money, Welch says. She adds that most financial goals for investments are things like college and retirement that have several years, if not decades, to grow and weather the storm of changing economic times. If you add money to your work 401(k) or a state 529 account, you’re already investing in the market.
Before you move to invest your extra cash, Holbrook cautions that you should make sure that you have any high-interest debt paid off first. Mortgages and student loans usually have low enough interest rates that your earnings from investing will make it worth your while to keep making minimum payments. Credit card debt, on the other hand, can have an interest rate as high as 20 percent. It will quickly eat up anything you hope to earn from putting your money in the market.
Make sure to look over all of your accounts to see where you might need your money next before you make a final choice. If you’re not sure which route to take, talk to a financial advisor.