When it comes to personal finance, there are a lot of options out there. One of the most common questions people have is whether they should save or invest their money. The answer to this question depends on a lot of factors, including your goals and objectives.
Factors That Affect Saving And Investing
2022 has been a tough financial year for many people. Inflation has continued to rise and central banks have been increasing interest rates in a bid to keep this under control. With consumers reining in spending due to rising prices and all the talk of slowing economies and upcoming recessions it may be concerning when considering where best to put your money.
High inflation erodes the spending power of your cash – $1 today will buy less in future when inflation rises. That has made it difficult to generate a real return on savings accounts as interest rates have been very low. But now these are starting to rise and savings interest rates are also starting to increase again. And whilst cash never makes the best long term investment, it is still important to hold some cash for access in the short term.
When inflation and interest rates are high, it can also have a negative effect on investments such as the stock market. When inflation is high, it means that the cost of goods and services is rising, which can lead to lower profits for companies. This can cause the stock prices to fall. And when interest rates are high, it means that borrowing costs are also high, which can make it more difficult for companies to invest and grow. This can also lead to lower stock prices.
But this is all short term volatility. There are benefits of investing over a long investment time frame, investments such as stocks have almost always outperformed cash over long time periods. What is happening in the news today shouldn’t have too much bearing on your overall long term financial goals.
Whilst all of these factors can have effects on your savings and investments, you may be wondering, should i save or invest? Here’s a look at some things you should consider when making the decision to save or invest to decide which is the right option for you.
Difference Between Saving And Investing
When considering whether to save or invest money, it is first important to understand the difference between saving and investing and the benefits and risks of each option.
The main difference between saving and investing is that when you save, you are putting your money into a low-risk account where it will not lose value and will earn a small amount of interest. When you invest, you are putting your money into a more volatile account where it can lose or gain value, but has the potential to earn a higher return.
Saving is a good way to build up a cash reserve for short-term needs, such as an emergency fund or a down payment on a house. Investing is a good way to grow your money over the long term.
Saving is a lower-risk option than investing, but it also has a lower potential return. Investing is a higher-risk option than saving, but it also has a higher potential return.
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Should I Save Or Invest? What You Need To Consider
Some factors that an individual should consider when deciding whether to save or invest their cash include:
1. Financial goals – What are your short-term and long-term financial goals? If you have a short-term goal (e.g. saving for a deposit on a house), you may want to keep your cash in a savings account so it’s easily accessible. If you have a long-term goal (e.g. retirement), you may want to invest your cash so it can grow over time.
2. Time frames – How soon do you need to access your cash? If you need to access it in the short-term, saving may be the better option. If you’re willing to lock it away for longer, investing may give you a better return.
3. Risk tolerance – How much risk are you willing to take? Investing involves more risk than saving, but it also has the potential for higher returns. If you’re willing to take on more risk, investing may be a good option for you.
4. Access to cash – Will you need to access your cash in the short-term? If so, saving may be the better option. Some investments, such as shares or property, can be difficult to cash in quickly if you need the money.
5. Other factors – There are other factors to consider, such as tax implications and fees. If you are unsure, you should speak to a financial advisor to get more information on saving and investing before making a decision.
Saving
A savings account is a type of bank account where you can deposit money and earn interest on your balance. Many savings accounts have a minimum balance requirement and may require you to pay fees if you do not maintain this minimum balance.
Should I open a savings account?
Even if you plan to invest, it is still prudent to save some cash aside in an emergency fund. This is because unexpected expenses can pop up at any time, and it is important to have some money set aside to cover these costs. An emergency fund can help you avoid going into debt or having to sell your investments at a loss in order to pay for unexpected expenses.
Benefits Of Saving Money
There are many benefits of saving money in a bank savings account. One of the most obvious benefits is that your money is safe in a savings account. Unlike investments, which can go up or down in value, the money in your savings account will always be there.
Another benefit of saving in a bank account is that it is easy to access your money if you need it. You can usually withdraw money from your savings account at any time, without having to pay any fees or charges. This is not always the case with investments, which may have penalties for early withdrawal.
Another advantage of savings accounts is that they offer interest on your deposited money. This means that your money will grow over time, as the interest is added to your account balance. This is not always the case with investments, which may not offer any interest or may only offer it at a lower rate than savings accounts.
Finally, savings accounts are usually very flexible, allowing you to set up direct debits and standing orders to make regular deposits. This can help you to develop a good savings habit and reach your savings goals more quickly.
Are There Any Risks Of Saving?
No matter whether you save or invest, there are still some risks involved. There are several risks associated with saving in a bank savings account.
The most significant risk is inflation. Over time, the purchasing power of money declines as prices for goods and services increase. This means that the money in a savings account will be worth less in the future than it is today.
Another risk is that interest rates on savings accounts may not keep pace with inflation, resulting in a further decline in the purchasing power of the money in the account.
There is also a risk that the bank could fail, in which case the account holder could lose all of their savings. Although many banks in the US offer FDIC insured savings accounts, these are backed by the government to protect savers in the event of the bank failing.
Does Opening A Savings Account Affect Credit Score?
There is a lot of misinformation out there about how savings accounts and credit scores are related. Some people think that opening a savings account will hurt their credit score, but this is not the case. A savings account has no impact on your credit score whatsoever.
However, if you have a checking account associated with your savings account and you overdraft that account, that can have a negative impact on your credit score. So, while a savings account itself doesn’t affect your credit score, the activities associated with it can.
Different Types Of Savings Accounts
There are several different types of savings accounts offered by many banks, credit unions and other financial institutions. If you are looking to open a savings account then it’s important to understand that each type of savings account works slightly differently. The different types of savings accounts are as follows;
Standard savings accounts are the most basic type of savings account, and usually offer low interest rates. However, they are convenient and easy to use, and typically have no fees.
High yield savings accounts offer higher interest rates than standard savings accounts, but may have restrictions on withdrawals and transfers. They are a good option for savers who want to earn more on their money but still have easy access to their funds.
Money market accounts are similar to savings accounts but often have higher interest rates and may offer check-writing privileges. They are a good option for savers who want to earn more on their money but still have easy access to their cash. This account is not to be confused with a money market fund, which is a type of investment fund.
Certificate of deposit accounts typically offer higher interest rates than savings accounts, but require the saver to keep the money in the account for a set period of time. They are a good option for savers who are looking to earn more on their money but can afford to keep it hidden away for a while.
Interest bearing checking accounts offer interest on the money in the account, but typically have higher minimum balance requirements and may have fees. They are a good option for savers who want to earn interest on their checking account balance and can maintain the required minimum balance.
How To Choose A Savings Account
There are a few things to consider when deciding how to choose a savings account. This includes; the type of account, interest rates, length of terms if using fixed term savings, fees, penalties and any other requirements.
The type of account is the first thing to look at. There are many different types of savings accounts, each with their own benefits and drawbacks. The most common type of account is a regular savings account. This is a good choice for those who want to save money over time without having to worry about fees or penalties, but is unlikely to earn much interest.
Interest rates are another important consideration. Standard savings accounts typically have lower interest rates than other types of accounts, but some accounts offer higher rates for certain balances. It’s important to compare rates between different providers to make sure you’re getting the best deal. Other account types such as money market accounts and CDs are likely to offer much better returns but come with more restrictions.
Length of terms is something to consider if you’re looking at fixed term savings accounts. These accounts usually have higher interest rates, but you’ll be required to keep the money in the account for a set period of time. Make sure you’re aware of the terms and conditions before you commit to an account.
Fees and penalties are something else to keep in mind. Some savings accounts have monthly fees, while others have penalties for withdrawing money early. Be sure to read the fine print before you sign up for an account so you know what you’re getting into.
Finally, consider any other requirements that may be attached to the account. Some accounts may require a minimum balance, while others may have restrictions on how often you can withdraw money. Make sure you understand all the requirements before you choose an account.
This may seem like a lot to compare but it is incredibly easy to compare the best savings accounts using a savings marketplace such a SaveBetter. A savings marketplace is a digital banking platform allowing savers to compare, open and manage multiple savings accounts from different banks in one central, secure and convenient platform. This takes the hassle out of searching through separate banks to find the best products.
SaveBetter allows you to compare and open a range of different types of savings accounts, including high yield and fixed term CD accounts, offering some of the market’s highest interest rates. All accounts are FDIC insured and can be opened with just a $1 deposit!
Compare the different types of savings accounts and get a higher interest rate at SaveBetter
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Compare the different types of savings accounts and get a higher interest rate at SaveBetter
Investing
Investing is the act of putting money into a venture with the expectation of earning a profit. Many people invest in stocks, bonds, and other securities.
The profit from investing comes in several forms. Some people view investing as a way to grow their wealth over time, while others see it as a way to generate recurring income.
There is the appreciation in value of an asset over time, known as a capital gain. For example, if you buy a stock for $10 and it grows to be worth $12, you have made a $2 profit.
Several types of investments may also provide an income which could be through dividends, royalties or interest payments. For example, by investing in a company that pays dividends, you receive a regular income and may also benefit from capital growth if the stock price rises.
However, investing also comes with risks. The value of an investment can go down as well as up, so there is always the potential to lose money. They are more suited to those who do not require short term access to their money as an investment time frame is usually 5+ years.
However, some people do make short term profits through active trading, although it is important to understand there are some key differences between trading and investing.
Benefits Of Investing
The main benefits of investing are that it gives you the potential for greater growth than simply saving your money in a bank account, and it also gives you the opportunity to generate different types of income, such as from capital gains or dividends. The main benefits of investing are as follows;
Wide variety of assets: One of the great benefits of investing is choice. When it comes to investing, the stock market probably comes first to mind for many people. But investing opens up a wider variety of assets to grow your wealth, these can be traditional assets or alternative assets. Examples include stocks, bonds, commodities, cryptocurrency, real estate and much more. Check out these 21 types of investment assets to grow your wealth.
Growth potential: When you invest your money, you are essentially buying a stake in a company or other asset, which means that you stand to benefit if the value of that asset increases. This is in contrast to simply saving your money in a bank account, where the value of your money is relatively static. Even if you have little capital to invest, you can still get access to greater growth potential through micro investing.
Different income options: When you invest, you can generate different types of income depending on the type of investment you have made. For example, if you invest in shares, you may receive dividends (a share of the company’s profits) as well as capital gains (if the share price increases).
View our 10 step beginner guide to investing and wealth building
Investing Risks
Although there are some great benefits of investing, there are of course some risks, including the possibility of losing some or all of your money. When investing your money into any asset the following risks may affect how your investment performs;
1. Market risk: The risk that the value of your investment will go down because of changes in the overall stock market.
2. Inflation risk: The risk that the purchasing power of your investment will go down over time because of inflation.
3. Interest rate risk: The risk that the value of your investment will go down because of changes in interest rates.
4. Business risk: The risk that the company you have invested in will not be successful and its stock price will go down.
5. Country risk: The risk that the value of your investment will go down because of political or economic instability in the country where the company you have invested in is located.
6. Currency risk: The risk that the value of your investment will go down because of changes in the exchange rate between the currency you are investing in and the currency of your home country.
Do Investments Affect Credit Score?
No, investments do not usually affect your credit score. Your credit score is a measure of your ability to repay debt, and it is not affected by your investments. However, if you open a margin trading account, that could affect your credit score as the provider may conduct a hard inquiry on your account which can temporarily lower your credit score.
Different Types Of Investments
A big difference between saving and investing is the variety of assets available as investment options when compared to the variety of savings account types. There are a wide variety of investment options to suit all types of investors.
Traditional assets such as stocks, bonds and cash offer a more predictable return, while alternative assets such as hedge funds, private equity and real estate offer the potential for higher returns but are more volatile.
Here is a list of some common investment assets, along with a brief description of how they work and their pros and cons:
Stocks: Stocks represent ownership in a company and can be bought and sold on stock exchanges. They offer the potential for high returns, but are also risky and can lose value.
Bonds: Bonds are loans that are typically issued by governments or corporations. They offer a fixed return, but are less risky than stocks.
Cash, or cash equivalents: These are investments that can be easily converted to cash. They offer a low but predictable return, but are not as volatile as stocks or bonds. Examples of these include money market funds, which have a slightly higher risk than a cash savings account but low overall investment risk.
Hedge funds: Hedge funds are private investment vehicles that are typically only available to accredited investors. They can be very volatile, but offer the potential for high returns.
Private equity: Private equity is another type of private investment vehicle, typically consisting of a pool of capital from investors. These investments are typically illiquid and high risk, but can offer high returns.
Real estate: Real estate can be a good investment for those looking for stability and rental income. However, it can be difficult to sell and is subject to market conditions. For many investors, the ideal way to invest in real estate may be through a REIT.
Ready to save or invest? View more assets in this post covering 21 types of investment assets to grow wealth.
Comparing Different Types Of Investment Accounts And Providers
When looking for the best investment platforms, investors need to consider a number of factors including ease of use, the range of investment types that can be traded, trading or account management fees, customer service, and the platform’s reliability and trustworthiness.
Ease of use is important because investors want to be able to quickly and easily find the information and tools they need to make informed investment decisions. The investment platform should also provide clear and concise instructions on how to use its features.
The range of investment types that can be traded is important because investors want to have a wide range of options to choose from. The platform should offer a variety of investment vehicles such as stocks, bonds, mutual funds, ETFs, and other securities.
Trading or account management fees can eat into an investor’s profits, so it is important to compare fees across different platforms. Some platforms may also offer discounts or other incentives for active traders and many offer commission free trading. Also important to consider are the different investment account types as you may be able to invest more tax efficiently through an IRA or other retirement savings account. For those wanting more investment choice than a traditional IRA offers, consider using a self directed IRA.
Customer service is important because investors may need help with using the platform or resolving issues. The platform should have a team of customer service representatives who are available to help investors via phone, email, or live chat.
Finally, it is important to choose a platform that is reliable and trustworthy. The platform should have a good reputation and be regulated by a reputable financial regulator. Learn how to identify and protect yourself from financial scams.
Saving Vs Investing Comparison
The comparison table below shows the difference between saving and investing. As we’ve seen there are benefits of investing and saving, but also a few downsides. By comparing both options side by side, you will be better able to make an informed decision on whether you should save or invest.
| Saving | Investing |
|---|---|
| Low risk | Higher risk |
| More suitable for short term financial goals | More suitable for long term financial goals |
| Low growth potential | High growth potential |
| Earns stable and predictable income via interest payments | Not all assets provide an income and those that do are not guaranteed |
| Usually easy to access quickly | May be less liquid or harder to access quickly |
| Few different types of savings accounts | Wide variety of investment assets |
Diversification
Diversification is important because it allows you to spread your risk across a number of different investments, which can help to protect your wealth in the long term. Cash can play a role in diversification because it is a relatively safe investment, which can help to provide stability for your portfolio. However, it is important to remember that diversification is not a guaranteed way to protect your wealth, and you should always consider your individual circumstances before investing.
Some people may decide to either save or invest, but for many people holding a mixture of cash savings and a diversified portfolio of investments is likely to be beneficial. Holding some cash in an emergency fund provides stability and peace of mind that you can easily access funds in case of a genuine need. But excess cash should be put to work to earn a better return by investing it for the long term. This is because the benefits of investing long term has the potential to build your future wealth and increase your net worth.
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Save Or Invest Conclusion
Now that we know the difference between saving and investing, let’s talk about when each is appropriate.
Generally speaking, you should save money when you have a short-term goal in mind and invest money when you have a long-term goal in mind. A long term investment time frame is usually considered to be at least 5 years or more.
Of course, there are exceptions to this rule, but it’s a good general guideline to follow when deciding whether to save or invest.
Whether you wish to save or invest your cash, it’s important to shop around and compare the best providers. The easiest way to compare different types of savings accounts is through SaveBetter. You can also compare the best investment accounts on Supermoney.
If you’re not sure what your financial goals are or how to achieve them, be sure to sign up for our newsletter. We’ll provide more personal finance tips and resources on our blog to help you out.
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