- Posted by: Administrator
- Category: Finance
Whether you’ve been working on your finances for years or you’re just getting started, it can be difficult to know when you should be saving and when you should be investing.
Saving is the safer route because the dollar amount in your bank account won’t typically decrease unless you withdraw funds, but interest rates on savings accounts don’t allow your money to grow very quickly. Unfortunately, interest rates are often lower than the rate of inflation. This means your savings could lose purchasing power over time.
It’s tempting to want to invest to receive higher returns and beat inflation. Unfortunately, the value of your investments won’t always go up. In some cases, investments can become completely worthless.
So, how do you know when you should stick to the safer route and save or risk more to earn bigger returns and invest? Here’s what you need to know.
Pros and cons of saving vs. investing
To give you a general sense of the pros and cons of both investing and saving, here’s a table.
Pros of saving
There are plenty of benefits to saving rather than investing. First, the dollar amount you save in a savings account won’t decrease over time as long as you don’t make withdrawals. This is important because some goals need to happen regardless of whether investment prices are up or down.
Saving rather than investing also allows you to reach your goal on time as long as you save the proper amount each month. Take the total you need to save and divide it by the number of months until you need to reach your goal to find the amount you need to save each month.
Cons of savings
Saving does have downsides though. Due to inflation, the money you save will decrease in value each year. If you earn interest, that interest may partially offset the negative effect of inflation. Unfortunately, interest rates rarely keep up with the rate of inflation.
Saving also means you’ll have to set aside more money each month than you would if you received higher returns investing. If you’re only earning one percent interest in a savings account but could earn an eight percent return investing, you’ll have to make up for that seven percent difference by putting more money in your savings account to reach your goal at the same time.
SOURCE: MONEY UNDER 30