Good financial health doesn't end at learning how to budget and just putting money aside for the future. Once you do find yourself holding on to a sum of cash, one big question to ask yourself is whether you should continue saving or try investing it instead. Found yourself holding a pile of cash and being unsure as to whether you should continue saving or to try and invest it instead? Well, read on further to figure out the right answer for you.
Saving VS Investing: What's The Difference?
Saving – it’s usually the first lesson our parents teach us about money. As adults, saving involves keeping aside money for the future regularly, usually in a bank. It’s a relatively ‘safe’ practice. Your money remains in your account, available for use whenever you need it. Investing, on the other hand, carries some degree of risk. When you invest, you’re using your money to purchase an asset or product that has the potential to give you better returns. While they are not guaranteed, investing does give you the opportunity to increase the value of your money over time. With saving, your money can actually become less valuable in the long run, as inflation rates tend to be higher than the interest rates banks pay for savings accounts. Hence, leaving your money in a bank account results in the purchasing power of your money diminishing as time passes. Investing can help you avoid this, either by retaining or even raising your money’s purchasing power if the returns are higher than the inflation rate.
How Much Should I Save VS Invest?
Before saving or investing your money, you need to first figure out how much you can afford to put aside. You want to make sure you are able to pay all your expenses, from recurring expenses like mortgage repayments, insurance premiums and utility bills, to day-to-day expenses like food and transport. Ensure that these expenses can be paid before saving or investing what’s left over.
Your next step should be to identify any short-term, medium-term and long-term goals that you are saving or investing for. For short-term goals of five years or less, you might want to consider saving instead of investing for them, because you might not have the time to recover from a loss or poor investment performance. For medium-term or long-term goals, investing is the better approach as it can help you achieve your goal quickly and easily.
However, you can’t invest without first saving up your capital. In order to raise this, draw up a budget and track your spending so you can identify areas where you can cut down on your spending. The fun begins when you've gotten your capital ready!
Investing: High Risk VS Low Risk
Investing always comes with some degree of risk of losing part or all of your capital. As a general rule of thumb, the higher the potential yield, the higher the risk and vice versa. Figuring out your risk tolerance is crucial to picking out the right investment products. Your risk tolerance depends on a number of factors, including age, goals, time horizon, financial commitments and personality. If you are a young, single person in your twenties or thirties whose primary financial goal is to retire three or four decades from now, you can probably afford to take on higher risk than if you are an older person in your fifties who is married with school-age kids, paying off a mortgage and car loan and foreseeing retirement in less than ten years. As a young person, you also have time on your side as you have more years to ride out the ups and downs of your investments, as well as recover from losses. Hence, there are clear advantages to starting young when it comes to investing.
Investment types for high risk investors
If you identify as a high risk investor, you can afford to put your money in investment assets that have the potential for high returns. Depending on your investment style, buying stocks can also be high-risk and high-return if you do so in hopes of turning a profit on them in the short-term.
Investment types for low risk investors
Low risk investments allow you to grow your money without having to worry too much over losing it. Do take note that no matter what kind of investor you are, you might wish to include a low-risk component like insurance in your portfolio which can help in mitigating riskier investments.
Before You Start Investing, Though...
It is important to first make sure that your family is well-protected financially before you start to invest. In the absence of financial protection from insurance products, you risk having your savings and investments depleted if something unexpected and unfortunate happens to you or a family member.
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