Once somebody begins to budget their income properly, they may end up with cash left at the end of the month. In fact, any cash left over at the end of the month should be included in the budget.
It is money that is to be put to one side. It isn’t to be spent that month. So, what should you do with it?
Well, you are faced with two choices. You can either put it into your savings or you can invest it.
We know that there are a lot of people that do not know which is the right choice for them.
We want to talk to you about whether you should be saving or investing any money that you have leftover at the end of the month. Before we can do that, though, we will need to look at the definitions of both.
What Is Saving?
When you are saving money, you will be putting money to one side. It is there for a ‘rainy day’. You know that once you have savings, it can be accessed whenever you wish.
Most people will keep savings in their normal bank account, but will mentally ringfence it. Other people may open up a separate savings account for the money so it is truly separate.
What Is Investing?
Investing is different.
When you invest, you will be taking your money and looking at investments. This could be stocks and shares. It could be hedge funds. It could be an education savings account. The choice is yours.
When you are investing, you will not have access to your money quite so easily. The idea of investing is that you will not have full access to your money for multiple years. If you do try to take it, it is a complicated process.
When Should You Save Money?
In our opinion, saving money should always be your main goal when you are trying to stabilize your financial life.
You should be saving until you have at least a year’s worth of expenses put aside. This means that if you lost your job, you would have access to funds for a year. This will give you time to find a new job while not suffering from any financial worries.
You may also wish to consider saving money if you have short-term goals (e.g., you are looking to take a vacation, or perhaps you are looking to purchase a brand new car).
Saving is going to be the safe option for most people. It is the option that we will often recommend the most. You know where you stand when you are saving.
You know how much money you have access to at all times, and you will be able to get access to it. That is key. If access to your money is the main thing for you, then you should be saving money all the way.
You could feasibly save all of your extra income for the rest of your working life. There is nothing wrong with that. Your savings won’t increase with inflation, but they are certainly going to be there.
Savings are right for you when:
- You do not have money set to one side in the case of job loss
- You want something safe
- You want instant access to your money
- You have short-term savings goals in mind
- You are a person who cannot tolerate risk
When Should You Invest Money?
Investing money is for those that want to grow their wealth. However, we cannot stress enough just how important it is to have at least 12-months of expenses saved before you consider investing any cash.
If you want to increase the amount of money that you have, then you should invest. If you invest properly, then you will be able to generate a return on the money that you invested. This means that your wealth will increase regularly.
However, you do have to bear in mind that investment is not always going to give you a return. Investments can and will also deliver losses.
This means that you should only be investing money that you can genuinely afford to lose. Chances are that you would never lose everything that you have invested, but you should think about that eventuality.
The thing with investing is that you will have to be hands-on with your money. Even if you ask a financial planner to assist you with investments, or place your money into funds where it will be invested on your behalf, you still need to know what is going on at all times.
Investing should only be for those with long-term goals in mind. This means that you are looking to generate a return over many years as opposed to many months.
It isn’t uncommon for people to have money invested for 10-15 years without touching it, just doing a spot of money management here and there. If you cannot deal with a wait for this long, then the investment life is certainly not for you.
Investments are good for when you have future expenses that you want to cover. This may mean retirement funds or saving for college for your children. They aren’t good if you want to buy a car six months from now.
You also have to remember that investments will not provide you with easy access to your money. Many investments will require you to leave your funds in place for a certain period.
If you wish to take them back earlier, then you will need to pay hefty fees for them. This is why they are never good for short-term savings. Even if you did make a profit in the short term, you would likely wipe out that return with all the fees that you are going to be charged.
It is worth noting that many investments will give you a small amount of income each month when your investment is making money. This is known as a dividend.
Remember, you will have to pay tax on any investment income that you have made for the year. So, do factor that in when you are trying to work out your rate of return!
So, in summary, opt for investments if you meet these criteria:
- You already have at least 12-months of savings
- You are willing to take a hands-on approach to your money
- You are aware of the risk of losing your money
- You are willing to invest in the long term i.e. multiple years
- You have long-term savings e.g. retirement or college funds.
If you meet all of these criteria, then investments could be a good option. It may be wise to speak to a financial advisor at this point.
Conclusion
Hopefully, by now you should have a decent idea about whether savings or investment will be the right option for you. However, do think hard about your situation.
Think about your overall money goals. If you aren’t 100% sure whether you want to invest right now, then put your money in a savings account. It won’t be going anywhere.
When you have made the final decision about the best route to go down, then move money from your savings account to an investment one. However, do bear in mind that once you go down that route, it is a financial decision that you are going to be living with for a long time to come!
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