Many times, for those managing their finances, a critical question arises: should I save or invest my money? Both methods carry distinct consequences for one’s financial trajectory. In this article, we will get to the bottom of this question – showing you both sides – pros and cons.
Easy Cash Access
Saving provides a safety cushion. With savings, money is readily available for surprises. Yet, bank savings interest is often low. Over time, your saved amount remains, but inflation can erode its value. If you stored $1,000 for ten years, its purchasing power might drop.
The Importance of Saving
Savings offer a financial buffer. Unexpected events happen, as seen in the early 2000s with the dot-com bust. Plus, savings help with unexpected purchases without taking a loan or even paying for a medical emergency. In short, savings are there to help when you really need them.
Potential to Earn More
On the other hand, right investing is a way to try and make your money grow faster. For instance, if you spread your money in things like stocks or bonds, historically, it has grown about 7% each year. That is actually not bad, especially in periods of low inflation. This means that over time, the money you invest could become a lot more due to the power of compound growth. Do not take it from us, take it from one of the most intelligent people in the world.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ― Albert Einstein.
The Good and Bad Sides of Investing
Now from just reading that passage above, you would think that investing is the right way to go. Yes, indeed investing sounds great, but it’s important to understand both the upsides and the downsides. While your money has a chance to grow, it also has a chance to go down in value due to changes in the market or problems with specific companies you invest in. In fact, the average investor who tries to pick stocks often loses money due to lack of knowledge.
There’s no one right answer to whether you should save or invest; it depends on what you’re comfortable with, your goals, and how long you plan to keep your money there. To be honest, just listen to the greats and do not try to reinvent the wheel.
“A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since has convinced me of its truth.” – Warren Buffet
Developing Financial Discipline through Saving
However, just following advice is not that easy. In fact there are professional fund managers that are paid to “do nothing”.
“Doing nothing is harder than it looks,” says Ken Lambert
Ken Lembert is managing a $35 billion fund, and it’s not that he does nothing – but often just buying the index is better than trying to pick specific stocks. In fact, his strategy proved better than for most other fund managers. So it is also about financial discipline.
Actually, in his book “The Richest Man in Babylon,” George S. Clason emphasizes the importance of saving as a way to cultivate financial discipline and create a safety net. He suggests setting aside at least 10% of your income for savings. By consistently saving a portion of your earnings, you develop good habits that contribute positively to your long-term financial goals.
When to Invest: The Benefits and Strategies of Investing
Something that investing gives you over saving is: passive income. By letting your money work for you, even while you sleep, investments can yield significant returns. Take Apple Inc., for example – early investors have witnessed their initial investment grow exponentially, with a mere $1,000 invested in Apple’s IPO in 1980 now worth over a million dollars.
However, on the other hand, it depends on the right time and the right stock. Not everyone can predict the next Apple, which now became the most valuable company in the world. So often, when you do not know what to invest exactly, it might be better to just save.
As the saying goes, “A penny saved is a penny earned.” Therefore, strategic saving should never be underestimated.
The Power of Passive Income and Inflation Protection
On the other hand, perhaps you could save to invest to generate passive income in the end. As Warren Buffett once wisely remarked that if you don’t find a way to make money while you sleep, you’ll be working until the end of your days.
Moreover, investments serve as a shield against the eroding effects of inflation. While keeping your savings in banks may yield meager interest that fails to keep pace with inflation rates, investments such as stocks or real estate offer the potential for substantial returns that can also counter inflation and make you some extra.
Fundamental vs Technical Analysis
If you actually chose investment over saving, let us give you some starting points. Investors commonly employ two approaches: fundamental analysis and technical analysis.
- Fundamental analysis entails scrutinizing a company’s financial statements (earnings, expenses, assets, liabilities) and comparing them with competitors’ performance metrics and overall market conditions.
- Technical analysis focuses on evaluating stock price performance by analyzing historical data, charts, candlestick trading patterns, and various indicators to assess future price movements.
Accessibility: Investment Opportunities for All
Investing isn’t just for the rich and fancy anymore. With technology anyone with the internet and a little money can start investing. Don’t worry about the perfect moment to jump in; it’s more about staying in for the long haul. John Maynard Keynes said, “The best time to invest was yesterday; the next best time is now.” Investing takes time and patience, like training for a big race. Think of saving as your starting point. But for those who dive deeper into investing? The rewards can be great.
