When building wealth, it is important to understand the similarities and differences between saving and investing your money. Knowing when to save and when to invest your money is a key part of your wealth building plan.
Let's start from the top. Basically, saving money is putting money aside on a regular basis. You spend less money than you earn and put the rest in a savings account at your bank. This should be an automatic part of your monthly budget. Remember, saving money is an important part of being financially successful.
Investing is taking this a step further, and putting money into the stock market by buying stocks, bonds, mutual funds, or other investment vehicles. Investing is absolutely imperative in building long-term wealth.
What Is Investing?
Once you have a good amount saved, you can begin investing money. Investing is the way that you will begin to really grow your money and begin to build wealth. For example, if you keep your savings in a savings account, the amount of interest you will earn will be very small. However, if you invest in mutual funds or stocks, your rate of return will be much higher.
The big difference? The stock market fluctuates, and it’s never a sure thing that you’ll earn money. In fact, you can lose money in the stock market, so be sure to keep that in mind when investing.
You will eventually come to the point where your investments make more than you are contributing each month. Your wealth really begins to grow at that point.
What Should I Invest In?
When you begin to build wealth, it is important to spread your risk. Mutual funds are an easy way to diversify your portfolio. These funds are spread out over many different stocks so that if one company fails, you do not lose everything. Another good idea? You should have your money invested in more than one mutual fund. You don't need to have 20 mutual funds, but three or four is a good start.
If you feel confident with investing in individual stocks, be sure that you spread your investments over a wide variety of companies, businesses, and sectors of the market (For example, do not invest all your money in tech.) It is not enough to invest in different companies if they are all in the same industry because sometimes entire industries can take a hit.
You may consider investing in other things. One example is real estate. This can bring you a good passive source of income. Real estate also tends to increase in value over time. However, do not do this until you are ready to purchase in cash, and can pay for any repairs or unexpected expenses out of cash flow. It also may require more work on your part, depending on how you choose to rent it out and whether or not you use a property management company, which can cut into your rental property earnings.
Real estate can be a great investment, but it also has its risks. Much like the stock market, property values can go up and down.
When Should I Start Investing?
Most financial advisers recommend that you wait to start investing until you have paid off the majority of your debt. However, this really depends on your interest rate. If you are paying a 0% interest rate on your debt, it may make more sense to begin investing before it’s paid off, since you can earn a greater percentage in returns. (The average rate of return on the stock market is around 7%.)
It’s also a good idea to have a solid emergency fund saved before you begin investing. You should have money in your emergency fund that relatively liquid and easily accessible, without paying a large penalty.A money market account at your bank is a safe place to put this.
Investing can help you build wealth. But keep in mind that you won’t be able to truly build wealth –and increase your net worth – until you spend less than you earn and get out of debt. That's why it’s still wise to stick to a budget, so you can save and invest effectively.
Who Can Help Me Start Investing?
So you’re ready to invest, but you’re not quite sure where to start. A good first step is to meet with a financial advisor.
A financial adviser can explain the different types of investments that are available to you. He or she can explain the risks and the potential gains to help you find investments that you are comfortable with.
Another option is to select an online brokerage site or robo-investor. The fees are lower and if you know the types of investments you want to make, you can save money in the long run.
One final thing to keep in mind: Investing is a long-term strategy for building wealth. It’s important to be patient, and ride out the times when the market is not doing well. Once you do this, then you can truly be on your way to building net worth.
Updated by Rachel Morgan Cautero.
FAQs
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.
Should I save or should I invest? ›
Saving is definitely safer than investing, though it will likely not result in the most wealth accumulated over the long run. Here are just a few of the benefits that investing your cash comes with: Investing products such as stocks can have much higher returns than savings accounts and CDs.
When you are starting out is it more important to save or invest? ›
The simple rule: If you need the money in the next three years, then save it ideally in a high-yield savings account or CD. If your goal is further out, or you don't have a specific need for the money, then start thinking about investing in something that will grow more, like stocks or bonds.
What are two reasons to save instead of invest? ›
Saving provides a safety net and a way to achieve short-term goals, while investing has the potential for higher long-term returns and can help achieve long-term financial goals. However, investing also comes with the risk of losing money.
Am I saving and investing too much? ›
Use the following signs to determine if you're saving too much for retirement: You're unable to cover basic living expenses. You have too much debt. You have no financial plan.
Which one is better saving or investment? ›
Which one is better, saving or investment? There is no single better option, as both savings and investments play a role in a healthy financial plan: Savings: Essential for building an emergency fund and saving for short-term goals. It provides peace of mind knowing you have a financial safety net.
Should I be investing right now? ›
Because investing is a long-term strategy, there really isn't a bad time to invest. In fact, bear markets can actually be fantastic investing opportunities because prices are lower.
Why save before investing? ›
Savings should come first. Before investing, try to make sure you have a separate low-risk, low-return account you can use to cover expenses during an unforeseen event — typically at least three to six months worth of living expenses.
Why is it important to start investing now? ›
The earlier you start investing, the faster you can grow your money and make it work for you. Inflation means your money is losing value when it's not invested. Saving and investing are different. It's important to do both, for money you may need in the near future (savings) and in the long term (investing).
Why should you invest? ›
Investing can bring you many benefits, such as helping to give you more financial independence. As savings held in cash will tend to lose value because inflation reduces their buying power over time, investing can help to protect the value of your money as the cost of living rises.
Investments should be seen as a medium to long term commitment. This means, you should be prepared to hold them for at least 5 years to give your money a chance to grow. Ideally, you should have an emergency fund – between 3 and 6 months' worth of living expenses –before you start investing.
What happens if saving is more than investment? ›
Savings are not part of GDP or Income.
Hence, If saving exceeds investment, the National Income will remain constant. National income is the total money earned by a country during a given year.
Why should we save money? ›
The future is unpredictable, and financial emergencies can crop up anytime. Saving money allows you to create a safety net for your future expenses as well as unplanned financial needs. The more you save, the more peace of mind you have, as you are better prepared for anything life throws at you.
Should I save or invest more money? ›
Saving is generally seen as preferable for investors with short-term financial goals, a low risk tolerance, or those in need of an emergency fund. Investing may be the best option for people who already have a rainy-day fund and are focused on longer-term financial goals or those who have a higher risk tolerance.
How much should be saved or invested? ›
This goes back to a popular budgeting rule that's referred to as the 50-30-20 strategy, which means you allocate 50% of your paycheck toward the things you need, 30% toward the things you want and 20% toward savings and investments.
What are the pros and cons of saving money? ›
Savings account benefits include safety for your savings, interest earnings and easy access to your money. However, savings accounts may have drawbacks, such as variable interest rates, minimum balance requirements and fees.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
Is it better to invest or save for down payment? ›
What I advise my clients is that if you need the down payment within 12–18 month do not put your money at risk in the stock market and keep it in a savings account (although you could do a little better than a typical savings account).
How much money do I need to invest to make $3,000 a month? ›
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
Should I save or invest in my 20s? ›
Start saving and investing today.
When you're in your 20s, time may be your most valuable asset. Consider saving 10% to 15% of your pre-tax income for retirement, but even if you only have a smaller amount to invest each month, it may still be worth it. Time in the market is key. Get started as soon as you can.
