Anyone who has some money to spare at the end of the month asks the question of whether to save or invest. But is there a simple answer?
The saying goes that you need money to make money. While many successful entrepreneurs have shown that this is not exactly accurate, there is some truth to it. Having money available allows you to take risks, start businesses, and create investment funds.
As such, the differentiation of saving vs. investing is not a true dichotomy. Sometimes saving is necessary, even when you want to invest. In certain cases, as with certificates of deposit (CDs), you can find a middle ground. Take a look at the pros and cons of CDs to learn more about a form of savings that brings higher dividends.
So, to answer the question, let’s take a look at some of the situations in when you should save and when you should invest.
Save: You Have No Savings
Jumping straight into investing is certainly tempting, but if you have no savings you are generally better off waiting. Why? Well, it is never too early to start saving. You do not know how the next few years, let alone the next few decades, will play out. If you don’t have any savings, you may find yourself ten years from now still getting started on building a retirement fund.
There is also a psychological aspect to it. If you start investing when you still have no savings, you are putting a lot on the line. This can lead to you making decisions that are either too risky or too risk averse. You are unable to look at investments objectively, because you feel like you have no choice but to succeed.
Invest: You Have a Retirement Fund
While it is ideal that you have savings that are separate from your retirement fund, a strong retirement annuity allows you the space and peace of mind to invest. If you are earning a good living from your salaried job, with significant deductions going towards retirement, you can invest without too much risk.
In this case, it may be worthwhile investing in low-risk investments, growing your money until you have enough cash and experience to start making savvy, high-growth investments.
Save: Worldwide Chaos
Of course, even when you have money to invest, that does not mean you should invest. After all, there are times when investing is foolhardy. For example, when the world is in a state of chaotic flux, investing requires not just a strong stomach but an ability to risk your whole investment.
Unfortunately, over the past few years, we have seen this kind of flux. The pandemic caused many previously-successful investors to lose their money. Choosing to invest in anything but low-risk options the first few months of the pandemic would have made no sense, with no clear outlook on when things would go back to normal.
Now, in 2022, we are again in a major state of flux, with global events leading to economic uncertainty, especially within the Web3 environment that until recently seemed on the verge of huge success.
Choosing to invest now is less risky than it would have been two years ago, but you have to decide on how much risk you’re ready to take on.
Invest: You Have a Lot of Capital Sitting Around
You may have inherited a large sum of money or sold an asset or business for a big lump sum. If so, it may be sitting around in a savings account with low dividends, barely growing. You may have ideas about how to use it but don’t plan on putting them into action anytime soon.
If this is the case, it may be worthwhile investing with a low-risk diversified portfolio. This can almost guarantee you returns above the current federal interest rate. It may require you to make a long-term commitment and it won’t make you wealthy, but it will ensure that your money works while you are not using it.
Save: Your Life is in Flux
The world’s uncertainty is not the only reason to hold off on investing your extra cash. Rather, you need to decide whether it is a good time for you personally to invest. Perhaps you are planning on having children who will bring expenses you are not accustomed to. Maybe you have an illness you need to take care of or a frail parent in need of your help.
In these cases, saving is necessary in the short term. You may regret the opportunities passing you by, but you would regret not having money when you desperately need it far more.
Invest: You Are Cruising
On the flipside, there are times in your life when things will be running smoothly. You may get used to this reality, becoming comfortable in your home with a life that is predictable. This is the perfect time to invest. You know what you have and what you need, and therefore have a strong idea of what you are able to invest. You have the peace of mind not to make any rash decisions. Saving vs. investing is not a true dichotomy. Ideally, you should be doing both. However, there are times when it is best to save and times when you have the perfect opportunity to invest.