When it comes to finances, there is a fundamental question that leaves most people confused: it is better to invest or save money? These two options, in fact, meet the same objective: getting money. Investing allows you to increase capital. Saving money, on the other hand, offers the possibility to put money aside for later without using it at the moment or even increasing capital at a certain interest. However, while saving does not do any harm, investing can be risky. Or is it the opposite? Find out in this article.
Investing or saving: what are the differences between the two?
Both options allow people to put money aside for the future. The only difference between these two solutions is that when you save, the money is still yours and you can use it anytime you want. In this case, cash has a low risk of losing value. When it comes to investing, the main aspect is to be wise and to know what you are doing.
Savings: the creation of capital
Saving is about building up a reserve of money that you plan to use in the future. Finally, when you save, you put money aside, increasing this envelope of available cash until you create capital. You can put money into a savings account or keep it at home.
Savings are usually kept for the short term. For instance, when you save money for purchases such as a car, house, education for your children, etc. Savings also involve minimal risk. You know that if you can rely on the bank you trusted your money with, there is nothing to worry about. If you put money into a savings account, you can earn interest. It is especially beneficial if you want to help your kids pay for college when they get older. The earlier you put money into a bank account, the more interest will grow over the years.
This way is only for people who know they cannot risk. If that is not you, you should consider investing.
Investing: making your money grow
Investing means placing your money, often for the long term, in order to make it grow. The sums mobilized then accumulate gains as time passes. These gains vary according to the investment medium chosen.
Thus, when a person withdraws their capital, it can, in the best case, realize gains, called capital gains. Conversely, if they lose money, they will lose capital.
Investing always involves risk. It does not guarantee a return if you put money into something risky. It is possible to lose all the cash you invested without returning one penny. When you make an investment, accessing it can take more days than if you put money into a savings account.
Invest or save? As you have understood, if saving does not generally generate a capital loss, investing can make you take the risk of losing money, depending on the media chosen.
There are, in fact, variations, especially if you invest in the stock market, for example. In this case, with the wrong strategy, you are at risk of losing your funds. In terms of investment, it is, therefore, necessary to have a behavior adapted to your needs and your risk profile.
Keeping all your savings: a good or a bad idea?
Even if keeping all your savings seems, at first glance, more reassuring, it may be a bad idea. The operation may not be profitable. Given the rates charged in 2022 on regulated savings accounts, this option does not allow your money to grow properly. Inflation has to be taken into account. The interest, which is too low, does not always make it possible to compensate for inflation.
Thus, although the capital of your savings increases, your savings lose value. In short, the money you accumulate no longer allows you to buy certain goods because of the increase in prices.
Saving is therefore interesting if you want to build up a safety cushion, an amount equivalent to three months’ salary to cover unforeseen expenses. If investing involves more risk, the operation nevertheless offers you the possibility of obtaining a higher return.
Precautionary savings means funds available and ready for use in case of unforeseen events or to finance your short-term projects.
Ideally, opt for media on which it is possible to withdraw funds easily, such as bank accounts, for example. To find out how much to save, take stock of your budget to estimate your savings capacity based on your income.
The best way is to ask financial advisors for help. If you know that financial aspects are not your strong suit, choosing a specialist to help you is also a great deal. However, before trusting anyone with your finances, check information about people on Nuwber or Instant Checkmate to avoid scams and financial frauds.
Very often, experts recommend distributing salaries according to the 50/30/20 rule:
– 50% of income should be used to finance fixed and mandatory expenses (rent, transport, insurance, loan repayments, etc.);
– 30% of income is to be used to finance fluctuating expenses (outings, hairdresser, shopping, etc.);
– 20% of income is for saving for the future.
Invest early to take advantage of capitalization
In terms of investment, the ideal way is to look into it as soon as possible in order to take advantage of what is called capitalization. Thanks to this mechanism, your investment will grow exponentially. The gains collected can then, in turn, be reinvested and again generate interest.
Let’s take a look at the following example. You invest $1,000 at an average rate of return of 5% per year. At the end of the first year, you will have earned $50 in interest (1,000 x 1.05), for a total of $1,050.
At the end of the second year, you will have earned $52.5 in interest (1,050 x 1.05), for a total of $1,102.05 without you having to do anything.
Invest, even small amounts
Finally, even if investing small sums seems ridiculous, the important thing is to start building up capital. Even if you invest one percent of your salary, the long-term impact will be significant. Rather than seeing this phenomenon as an additional burden, it should be seen as a change in the functioning of your financial situation.
Going back to the balanced budget rule, rather than doing a 50/30/20 split, you can do 50/30/19/1 and invest that last percent. This way, you can make a small portion of your savings work for you without impacting day-to-day expenses. At the same time, you will no longer have to choose between making investments or saving.
However, it is up to you to decide what is better when it comes to finances. Only you know your financial situation, how much money you have left, and how much you need. It depends on whether you like risk or just want stability.