The Big Dilemma: To Invest or to Save?

Jul 7, 2021 08:55 PM ET
The Big Dilemma: To Invest or to Save?

Saving is an act and a habit of setting aside funds for future use in a project or emergency. Many financial institutions offer savings accounts, which come with different benefits.

Saving is usually a good way to meet one's short-term goals. The key advantage that saving has over investments is its "open-for-all" nature. You can save regardless of how much money you have and regardless of your age. The key to saving is knowing what you are saving towards and contributing to give you a realistic chance of achieving your goals.

Investing is about channeling money towards a yield-bearing plan like stock, real estate, mutual funds, etc. Investing is mostly driven by an intention of accruing benefits in the form of appreciation of the value of the principal sum over time.

Investing is by design meant to counter the effects of inflation, thereby ensuring that the value of the capital invested does not depreciate. Therefore, for investment to be meaningful, its yield should exceed the rate of inflation during the period of investment.

It wouldn't make sense for one to put their money in an investment whose returns they know will stagnate over the years.  If the annual inflation rate consistently beats your investment's annual rate of return, then it means that your money will be worth less than its value when you finally withdraw it. Therefore, you'd be better off if you spent it earlier.

Benefits of saving

  • The concept of saving is simple, and anyone can understand it. This is unlike investments, which require varying degrees of understanding of the market.

  • If you choose to save in a financial institution like a bank, you will know the exact interest you'll earn throughout the savings period. Therefore, your earnings are assured, and you can plan for them beforehand.

  • The money you deposit in your savings account is insured through the Federal Deposit Insurance Corporation. Therefore you get peace of mind knowing that your savings below a quarter a million dollars can never get lost even if the bank goes under.

  • You can easily access your money from the bank savings account, although you may incur penalties in instances where you had gone for a locked savings account or where you exceed the number of monthly withdrawals stipulated under the account's terms.

  • You can start saving with very little money, unlike investment, which can have limits depending on the type of investment.

Disadvantages of saving

  • Savings accounts have low interest rates on customer deposits. In fact, in many cases, the yields you get will be lower than the inflation rate. This makes saving less attractive as a long-term wealth creation strategy.

  • Due to the low rate of return on savings, your money will be worth less than its initial value if you keep your money held in the savings account for too long.

Advantages of investing

As you may have deduced from the description above on investing, it can be more rewarding than saving, but the risks involved are relatively high.

Below are the main advantages you will enjoy by investing your money.

  • Investing yields more returns than saving. Even though the market may at times go against an investor, the market typically returns positive yields in the long run. For instance, the S&P 500's average annual returns stand at 10%.

  • Except for land-based investments, many investment options are liquid. For example, ETF and stock can easily be sold for cash.

  • A diverse investment portfolio can easily yield returns at a rate higher than the annual inflation rate. This translates into a net profit for many investments. Savings accounts hardly beat the inflation rate.

Disadvantages of investment

  • Investments are unpredictable. Securities like stocks and ETFs can easily go against your expectations when the market doesn't favor your position. Brick and mortar investments like real estate can take a long time to start yielding returns, such as when they fail to attract buyers or renters. On the contrary, savings locked in an account are assured, with negligible risk to both your principal funds and interest yielded.

  • Most investments take time to yield meaningful returns. Therefore, investment requires a relatively high level of patience. In the intervening period, your money will be locked up, and you may not access them.

  • Some investments require large capital, while saving has no minimum limits. In addition, there are age limits to some forms of investment.

  • Investing requires a good understanding of the performance of the market and the macroeconomic dynamics that may affect your investment. Therefore, you will need to research deeply and sharpen your technical skills. Alternatively, you may have to hire the services of a skilled expert, and this may be costly.

In summary

Whether you intend to invest or you are only intent on saving, it should all depend on your finances and development goals. You should understand the implications of either choice and go for the one that can best help you get where you want to be.


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