Invest or Save: How to Decide What to Do with Your Money Now

Invest or save? Well, this subject for me has been a huge debate over the past 10 years or so. Why is that you might wonder? It’s mainly because now that I am retired and not earning a regular weekly paycheck, I have become much more defensive about my money. I think “protection” while at the same time trying to save more (when it comes to my spending habits). That is rather than taking risks with my money as I did when I was younger and had that big horizon of earnings and time ahead of me. But am I making the right decisions? I have asked myself, time and time again, should I save my money or should I invest it?

Scale with clock on one side and money on the other representing the choice between invest or save

What Do These Words Mean and How Are They Different?

The words “invest” and “save” are sometimes used interchangeably, but in reality, they are totally different animals. In different times of your financial life, the blur between them is hard to see. That’s because the goal of both of them is to increase your wealth and secure your financial future. So at times they really are the same thing. The only real difference is that saving your money has almost zero risk while investing it can put risk into orbit. When it comes right down to it, for many risking money isn’t a good idea. Saving money typically means it is available when we need it and it has a low risk of losing value (other than the inflation factor which right now is a huge factor!).

But the biggest and most influential difference between saving and investing is risk.

Saving Money

I have made it my life’s work over the past decade to save money. In this case, I am not speaking about taking money from my earnings each week and socking it away into a bank or investment account as I used to do years ago.

For me, I look at my spending and try to save money when I do it. One of the things I love to tell people is that saving money when you need to spend your money is just like earning money, it’s money that you don’t spend. So where does that money go? It goes right into your pocket until you need it next time. If you get real good at it, you may be still holding on to that first penny everyone jokes about. Well, maybe not, but you see my point here.

You Can Get Smarter and Better at Savings

I learned about saving money as a child. I use those lessons all the time, but now more than ever because I’m good at it and I love doing it. I love the challenge of getting the best deal and I love telling others what I do and how they can do it, too. But you don’t really need me to teach you, because you already know the fundamental principles.

You save for purchases and emergencies. Saving money typically means it is available when you need it and it has a low risk of losing value.

So what do you do? You track your savings, putting a deadline on it, or a timeline on it, and a value to your goal. For example, if you are saving for your annual family vacation, you might want to target $2,000 to $3,000 to save over nine months to withdraw next year. You then know how much you need, how much to save monthly, and you have the ability to take the money out without fees to spend on that important vacation time. You do that to plan and succeed at that goal.

When it comes to dealing with money every week, you plan ahead for your food and grocery budget, shop from a list, use coupons, etc. and at the end of the month, you’re hitting your goal and have a few extra bucks still in your wallet…hopefully.

But What About Investing?

The first thing to say upfront here is simple: If you don’t have enough money to get through your regular monthly expenses, investing may not be for you right now. If you are in debt, struggling to make ends meet, and think investing is like buying a lottery ticket to “win big”, stop that. Investing comes with risks—some with bigger risks than others—but always a risk.

But the truth is that we should be engaged in both saving and investing at some points in our financial life if we want to secure our financial future.

When investing, it is important to invest wisely. You will have a better return if you begin investing early in your earnings timeline. That’s because time is your best friend here. As investments and markets go up and down in their cycles (as they always do), time allows you to recover from losses and grow again. If you have any doubts about how markets can grow, consider the Dow Jones Industrial Average (DJIA) which today stands at a value of about 34,000. Five years ago its value stood at about 19,000.

Simple math says that the investment values have risen over 78% during that time.

Many people have scored bigtime, but some have not. That’s because timing and strategies are factors, but sticking in there for the long haul and using time as a friend helps quite a bit. If you can, do it.

Is It Saving or Investing?

Understanding all of the different investment vehicles, what they are for, and how to use them is imperative to being a successful investor.

We save (even if we say invest) for long term goals, such as our children’s college fund or retirement. We use specific vehicles that allow for growth. If our children have 10+ years before they go to college, we can invest monthly in a no-risk vehicle like an education savings account (ESA) or a 529 plan. These allow for withdrawals when your child goes to college. Long-term college plans can help you successfully reach that goal.

You save when you put money into a savings account like a money market account or Certificate of Deposit (CD). It has little risk of loss of funds (except to the aforementioned inflation), but also has minimal gains. When you save, you are usually able to pull that money out when you need it (or after a defined period of time). When you invest, you have the potential for better long-term gains or rewards, but also the potential for loss.

The Markets and You!

A general rule of thumb is that saving should be short-term while investing should be long-term. Keeping that in mind, let’s review the differences. Also, keep in mind for both saving and investing that when risk goes down, liquidity goes up, and vice versa.

Your risk tolerance is tested more in investing, but your potential loss/gains can be large. It is important to review your goals to figure out which option is best for you: saving or investing or both. Choosing incorrectly could cost you a lot of money in fees or loss of potential income earned through investing.

In investing, we want our investments to make us money, while the goal of saving is primarily to keep our money safe, making a much smaller return. That’s why a CD is such a popular savings tool. It can be a relatively short-term, is safe, and grows at a slightly bigger interest rate than in a regular savings account.

It is possible to be a wonderful investor, have growth in your 401(k), and even have investment properties, but be unable to make ends meet because you do not understand how to save your short term funds.

You can save money each month, but in the long term, those savings will not pay for your retirement (even with Social Security), and most likely will not even pay for your children’s college. That is why investing is so important. You will probably need some professional advice and help to plan for these and other long-term future events.

The Invest or Save Checklist

Do you have an adequate cash cushion that would cover three to six months of fixed expenses (i.e. an emergency fund)? If not, then start saving.

Are you on track toward reaching your retirement goal by your desired age? If you are like most people today, you aren’t and you may be putting off even thinking about it. That shortens your timeline and makes it all an even bigger problem. If not, start investing.

Do you have other short-term goals requiring quick access to cash (like travel plans)? If so, start saving.

Do you cover your monthly expenses, have an adequate cash cushion, have short-term savings as well as long-term retirement investments? Sounds like you can handle both saving and investing.

Final Thoughts

Earlier this year, just for fun, I started a no-fee investment account online where I bank. I picked my own stocks and invested with just a small amount of money to see what would happen. For me it was just “fun money” and an experiment. I could afford this risk and I wanted to see what would happen if I studied and read and then took a long term approach. Behold, my return has actually been pretty good! So far, after 11 months I have seen over 15% growth in my money and that included several dividend payouts that added to the shareholding (I reinvested those dividends). Even with an inflation rate of about 6%, I have to say I am pleased with my results.

While this post doesn’t cover everything when deciding when to invest or save, it’s a start toward envisioning your financial future and plotting out how to try to get there.

As I always do, I suggest working with a financial advisor to review your current financial status, future financial goals and a plan for reaching them.

If you are not doing either saving or investing, the time to get started is now. This may require changes in your spending habits, tracking expenses, and using your income to develop your true financial plan. No matter where you are right now, you can change it and make it better. The time to start is now!

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