Many new investors are unable to differentiate money saves and money invested. However, saving and investment accounts serve different roles on the balance sheet and one’s financial strategy. Depending on the financial strategy and goal, you need to choose between saving and investing.
In general, saving involves putting part of your earnings aside, bit by bit. In other words, it if deferred consumption. One may save to buy a home, go on holiday, or cover future emergencies. Savings generally entails putting money into cash products like a saving account in a bank or Sacco.
On the other hand, investing involves using your money to get more money by buying things that will increase its value. One may invest in property, stocks, or shares in a fund.
How Much Should You Save vs. Invest
On the list of preferences, saving generally comes before investing. Saving is the foundation for one’s financial house. In many cases, those who don’t inherit large amounts of wealth use their savings as capital for their investment. In general, one should save enough money to cover their personal expenses like loan payments, mortgage, utility bills, insurance costs, clothing expenses, and food for at least three to six months. This gives sufficient time for an adjustment in case of loss of employment. In addition, you may also save for a specific purpose that requires large amounts of money.
In general, money in a saving account is much safer, as the dollar in the bank account does not decrease unless withdrawn. However, due to interest rates, money in a saving account does not grow quickly. The interest rate is also always lower than the rate of inflation, which makes the saved money lose purchasing power over time.
Investing can also be tempting, especially with the promise of higher returns and the need to beat inflation. In many cases, the investment value doesn’t always go up and can become completely worthless.
Pros of saving
- The saved money does not decrease over time as long as it is not withdrawn. This helps the saver to implement investment plans, whether prices are up or down.
Cons of savings
- The saved money may reduce in value due to inflation. The interest earned helps to offset the negative impact of inflation.
Pros of investing
- Investing gives one the potential to grow their money faster than having a saving account.
Cons of investing
- Investing comes with risks. Investment price could hike right before you need the money, which could leave you in a financial bind.