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When to Choose Saving Instead of Investing


When to choose for saving instead of investing

Setting away money for your future self is always a smart move, even if you have a tight budget. But even while you accumulate your emergency fund, you could be considering whether investing your money would be a better use of your resources.

It might be difficult to determine exactly where your money should be invested, whether you're making plans for a trip the following year or your retirement in thirty years. Depending on your financial goals, you should choose saving above investing.

When to put saving first

Financial FOMO-like temptations might lead people to pick investments over saves, especially when the average stock market return appears to be much more attractive than a supposedly "high-yield" savings account. (Business Insider does an excellent job of bringing this specific dilemma to light.) However, carefully examine your schedule for using your assets before choosing equities over savings.

If you expect to need your money at some point in the next five years, make saving a priority. You may need to increase your emergency money or have set your sights on a trip or a down payment for a home. (As a point of reference, a "starting" emergency fund is about equal to one month's rent plus your insurance deductible. From there, supposing you've paid off any high-interest obligations, you should continue creating an emergency fund that can last you at least six months.)

It all boils down to keeping in mind that savings accounts are easier to access and involve less risk than investments. Sure, reducing risk could seem like "lower return," but it also means you won't lose money in your savings, which is more essential (unless you count a possible loss due to inflation). The following is our advice on selecting a high-yield savings account.

When to make investment a priority

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The ideal scenario is for your investing strategy to align with your savings goal if you already have a sizable emergency fund. Savings accounts are the best option for a short-term vehicle, but investing may help you achieve your long-term objectives, like as setting money aside for retirement or paying for your children's college.

The trick is to avoid making decisions about saving or investing based just on short-term financial FOMO. For instance, it would be foolish to invest in growth stocks that are intended to be held for at least five years if you are tempted to do so because you are planned a significant trip in a few months and feel confident the present quasi-recessionary market has bottomed out.

The conclusion

It makes little sense to invest that money in equities if you anticipate using it within the next five years, even while interest rates on savings accounts are low (and now rising). Don't make the mistake of investing short-term cash in a long-term savings vehicle; instead, review your financial objectives.

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