Should You Save Or Invest?

Once you’re starting to feel like you’ve “made it,” those first few paychecks are incredibly exciting.

Finally paying off a big debt can feel like a sweeping relief—extra funds are back in the budget! Of course, it’s fun to spend some of it. But once you stop living from check-to-check or overcome your debt obstacles, you have an opportunity to create a base point for yourself. Most of us know that successful people invest but beyond that, it’s confusing. How do you know if you should be squirreling away your money in a rainy day account or trying to generate returns with investment and trading? How can you tell if it’s smarter to save or invest?

Are You Saving Enough?

Most experts agree that saving is the most financially solvent decision to start with. Financial coach Shanaan Dawda recommends having at least 3-6 months of basic income—rent, food, electricity, and other essentials—in a savings account before you consider investing. There isn’t a guarantee that you are going to make money when you invest, so you need to make sure you have a solid “nest egg” to keep you optimistic (or even just afloat) in the event that your investments don’t work out or you have a personal emergency. These savings should be “liquid”, meaning you can access them without penalty when you need to. In addition, you need to make sure that 5-10% of your monthly income is going directly into your retirement savings. There’s no way to make up for lost years so the earlier you start saving for retirement, the better.

Ways To Save

– 401K: If your employer offers you a 401K, sign up immediately. Make sure you take advantage of having access to this fund, even if your company doesn’t have “matching contributions.” A lot of companies have “matching contribution” programs up to a certain dollar amount so you can really increase the amount you save each year. Even if you change jobs, your 401K will come with you.  You might see a traditional 401K or a Roth 401K. The main difference here is that you pay taxes on the money you’re putting into your account. When you get money out of your Roth 401K, it won’t be taxable.

– IRA: If you don’t have access to a 401K plan because you’re self-employed or your employer simply doesn’t offer one, you still have the opportunity to make huge contributions toward your retirement from your first paycheck through an IRA. Just like 401Ks, there are “traditional” IRAs and “Roth” IRAs and the difference is based on when you’ll be paying taxes.  Which one is right for you depends on what your “retirement income” will be, between social security, 401K funds, and other savings and investment vehicles.

– Savings and Money Market Accounts: These are two of the most accessible, liquid accounts you can use for everyday savings. The main difference between the two is the rate of return on your savings. In a Money Market Account, your interest percentage is tied to market interest rates, so the returns can be higher. It also has some minimal check-writing ability, making it a bit more flexible than a traditional savings account.

– Certificate of Deposit (CD): Although liquid savings can be beneficial, “illiquid” accounts give you an opportunity to earn at higher rates. If you get a CD, you’re entering into an agreement with the bank not to touch the money for a certain period of time. In exchange, the bank guarantees a certain amount of earnings once they release the funds. It’s an easy way to make some interest on a shorter term than a retirement account or other long term plan.

– Under The Mattress: an old, reliable trick of many of our grandparents, this is not a highly recommended savings vehicle. Hiding cash around your house increases the likelihood that you’ll lose track of some or all of those funds. In addition, there’s no interest to be gained. Since the Great Depression, banks have had federal insurance (FDIC) for any account up to $250,000, so your funds will be safe no matter what happens to the bank itself.

To Save or Invest?

If you’re meeting your savings goals and you’re ready to move into the next stage, then it’s time to tackle investing. There are tons of ways to do it. You don’t have to be a market expert or have tons of cash lying around to get started. You can use the resources you have available online and in-person to make the best financial vehicles for you.

– Mutual Funds: Investing in mutual funds is usually considerably less risky than other options. Mutual Funds are portfolios of different stocks & bonds which are managed by financial professionals. Investing in a mutual fund will automatically diversify your portfolio more than a single stock or other investment—which can be very important, depending on how the market goes. They also don’t require a lot of follow up, particularly when compared with other investment vehicles.

– Business or Real Estate: With the growth of technology and a highly connected world, more and more average people are investing in businesses and in real estate. We’re becoming more familiar with “crowdfunding” through an online engine to get an idea off the grown. Real estate is very market dependent but having a tangible asset often seems like a smarter move. However, you have to be well aware of possible market fluctuations and stay alert to keep ahead.

– Stocks: Directly trading stocks requires time, dedication, and close attention to detail. A lot of people think of the stock market when they want to invest and it seems too intimidating. Managing your own stock portfolio along with a full-time job or other significant time commitment can be too much and make you more likely to lose money than to earn. With smart picks and close observations, many people do decently well in the stock market. This is where you’re going to see your biggest gains but your risk is always the highest. Choose wisely before going for stocks.

– Bonds: These are similar to investing in a company directly and are very different from stocks. Where stocks change on a daily, hourly, or even more frequent basis, bonds are essentially a type of business-specific loan—when you buy a bond, you’re helping a government or business expand but creating a debt they owe you. Check out Investopedia’s video to better understand the differences between stocks and bonds.

Your money is your future. Whether you decide to hang on and save or invest and try to grow your wealth, staying on top of your decisions and monitoring your portfolio is extremely important to long-term success. You may want to consider looking at financial advisers and planners who can help you make choices that best fit your goals. Learn about your options and take control of your financial future.