Most of the time, we were forced to choose between saving and investing. We've found ourselves in this situation and don't know what to do. We probably have cash on hand at the time, and we don't want to waste it. In this article, I'll explain when it's best to save and when it's best to invest.
It is critical to understand that saving and investing are two closely related strategies for achieving financial independence. To do either of the two, you must give up one aspect of your life: spending. This is to allow you to accumulate wealth for the future.
KEY DIFFERENCE BETWEEN THE TWO
The distinction between saving and investing is whether your unspent funds are held in cash or in another form.
SAVING: This refers to putting money aside for future use. In this case, you're gradually putting money aside, perhaps in a bank account, for future use. People save for a variety of reasons, including a down payment on a house, purchasing a car, or dealing with any emergencies that may arise.
INVESTING, on the other hand, is the use of cash to purchase other assets that you expect to generate profits or income. Essentially, you are investing some of your hard-earned money in assets with the intention of letting them grow or increase in value. These assets could include stocks, real estate, cryptocurrency, or mutual fund shares. When you invest money, you use it to purchase another asset. Profits or income are the goal here.
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WHEN SHOULD YOU SAVE?
If you'll need the money soon, you should prioritize saving over investing.
When you have an income but little or no cash on hand, you should save. Set a goal of saving enough money to cover six months of your living expenses. This safeguards you against unexpected financial crises such as a car accident or job loss.
You want to have immediate access to your money. You require the funds within five years. Perhaps you have emergency funds and have set your sights on another goal, such as a down payment on a house. Perhaps you're putting money aside for an annual car insurance premium. Short-term savings should be kept in a savings account with guaranteed returns rather than invested in the stock market.
WHEN SHOULD YOU INVEST?
You have long-term objectives that will necessitate a significant investment. These are expenses that will not be incurred for at least five years. A large one is retirement, or a college fund for younger children.
When you are willing and able to accept some risk, and you will not need the money for at least 5 years. There is no guarantee of profit when investing, and you may receive less than you invested.
When you want your money to grow faster than it could with cash
After you've saved a stash of cash that you can easily access for emergencies - a good rule of thumb is to have 6 months' worth of expenses.
So there you have it are you willing to save or invest? Those are a few things you should consider.