Savings Vs Investing: Pros and Cons

2022-04-01

No matter how long it has been since you started managing your finances, it’s often challenging to choose the best time to start saving or investing for your goals.

While saving in your bank account is the safer option, a drawback is the account interest rates that do not allow your money to increase quickly. Regrettably, interest rates are frequently lower than the rate of inflation. So with time, your funds lose purchasing power.

This is where investments may be the better option as you have the option of earning bigger returns to beat inflation. However, the value of your investments does not always rise, and investments can lose all of their value depending on the investment option you employ.

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In this article, we will be exploring the pros and cons of saving and investing and the best way you can do both.

What is saving?

Saving money is the process of putting money away and depositing it in very secure securities or accounts. The money can be accessible in a relatively short time, so your money is liquid.

When you save, your cash reserves are available to use promptly and with minimal delay. Most prominent investors encourage keeping enough cash on hand in certain cases, even if it means taking a significant loss because since you are not investing, they will cost you the higher rates of return you’d obviously be losing.

What is investing?

Investing is the process of utilizing your money (or capital), to purchase an asset that you believe has a fair chance of generating a safe and acceptable rate of return with time. The purpose of investing is to yield more money, even though you could experience volatility for a while.

 Pros of Saving

There are numerous pros to saving instead of investing. Firstly, as long as you don't make any withdrawals, the naira amount in a savings account will not decline over time. This is important because you may have certain obligations to fulfill that would not care if any investment prices are rising or falling.

Also, saving instead of investing allows you to attain your objective on time if you set aside the appropriate amount each month. So, what you need to do is, divide the total amount you need to save by the number of months till the deadline of your goal to determine the amount you need to save each month. You may also consider saving a little more each month in case of any abnormalities in price.

 Cons of saving

While the pros are interesting, there are also drawbacks to saving. Each year, the value of the money you save decreases due to inflation. The interest rates could have helped to mitigate the negative impact of inflation but regrettably, the interest rates barely keep pace with the inflation rate.

Additionally, saving for a financial goal may require you to set aside more money each month than you normally would if you obtained higher returns on your investments.

Pros of Investing

Investing, of course, has its advantages. It allows your money to increase at higher interest rates than it would in a savings account.

Your returns will compound if you have enough time until you need to reach your financial goal. So, in addition to a better rate of return on investment, your investment earnings will make you money over time.

Another advantage is that, with higher compounding returns, you invest less money every month than you would if you were saving to accomplish your objective.

Cons of investing

Investing, just like saving, isn't always a positive move because investment prices may fall just when you need the money, putting you in a financial jam.

And if this occurs, depending on your loss, you may have to choose a less expensive choice, postpone your objective until you can save more money, or defer your goal until the value of your investments increases.

When should I save money?

Though it is usually tricky to decide on when to save, these conditions should help you choose correctly:

1. Limited timelines

When you just need your money for three years or less, choose savings. While investments should be held for at least three to five years to allow for maximum gains and to ride out market volatility, savings are less concerned with returns and more concerned with having a steady source of cash on hand.

 2. An emergency savings account

When an unanticipated emergency arises, you want unlimited access to your funds as soon as possible. Your top concern is to safeguard your emergency money, so if you haven't already established an emergency fund, you should do so before you begin investing. Most experts recommend keeping three to six months' worth of expenditure in an emergency fund.

 3. When you have a timeline for your financial goals

If you know exactly when you'll need your money – let’s say, you want to buy a house next year – saving is usually the preferable alternative. This is mainly because since investments are volatile and quite unpredictable, you cannot perfectly design your withdrawal to happen when values are rising.

 4. For crucial financial goals you can’t risk

When you need to make critical expenditures that may not allow you to put the value of your money at risk, saving is your better option. For example, with expenditures like hospital bills for your pregnant wife, or daycare funds for your soon-to-be-born child, your priority should be keeping your money safe.

When should I invest my money?

These are the conditions to meet before you can start investing.

1. Long term goals

If the timeline for your financial goals is at least five years, (and you can take some risk) investing the cash will almost certainly give larger returns than saving.

2. When you are ready to create more wealth

You need to have an emergency fund and no high-interest debt before investing. If you have none of these, then investing your surplus cash can help you expand your wealth over time.

Wrapping Up

Savings or Investing?

The answer to this question is entirely dependent on your risk tolerance, financial status and requirements, and the time frame in which you would require access to the funds.

While investing can potentially yield higher returns than savings accounts, it comes with risk, particularly over shorter time frames.

And if you're saving for a short-term objective, you should consider putting it in a savings account. However, you enjoy more satisfying rewards when you invest long term.

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