Saving vs. Investing: Choosing the Right Financial Strategy

Saving and investing play a critical role in a well-rounded financial strategy. While saving provides a safety net for unforeseen expenses, investing is a means of building wealth. Once you have an emergency savings fund of three to six months’ worth of living expenses, you can develop a strategy to grow your wealth through investing.
 

Balancing Saving and Investing

Many experts recommend building a solid savings fund for emergencies and retirement before investing in riskier stocks. The reason is simple: stock market fluctuations can cause investors to lose money. Without savings to fall back on, poor stock market performance could leave you with no financial resources in case of an emergency.

When It’s Important to Focus on Saving

Saving money is particularly useful if you have immediate or short-term expenses that your monthly income wouldn’t cover on top of your usual spending. While it may take time to build up savings for specific expenses, doing so can help you avoid relying on high-interest debt because you have a guaranteed cash reserve.

Here are some reasons to save money:

• Unexpected emergencies. Putting money into a savings account in advance can prevent you from relying on credit cards or expensive loans when a crisis hits.
• Long-term financial goals. Long-term financial goals allow you to set aside money for future expenses, such as a down payment on a house, saving for a university fund, saving for driving lessons, or a new car. The important thing to remember is that you need to be disciplined about saving for your long-term financial goals. Remember the more you save, the faster you'll reach your goals and avoid getting into debt.
• Homeownership costs. Owning a home has ongoing costs such as property taxes, insurance and maintenance that should be factored into your savings plan.
• Travel expenses. If you're planning a holiday where you expect to spend more than usual, it's a good idea to build up a cash cushion in a savings account.
• Retirement planning. As you get older, saving becomes increasingly important. To live comfortably and independently in retirement, it's important to start saving early. Assuming a retirement age of 55 and a life expectancy of around 80, you should aim to save enough to cover expenses for 25 years.

When It’s Important to Focus on Investing

For financial goals that are at least three to five years away, the benefits of investing usually outweigh the risks. If you’re hoping for capital appreciation and feel comfortable with more financial risk, you have a variety of investment products at your disposal — from stocks and bonds to mutual funds and exchange-traded funds (ETFs). Your investment portfolio should include a mix of investments that offer potential returns on your capital while mitigating the impact of a market downturn.
 

Here are some situations where it makes sense to invest:

• Securing your retirement. Investing your own money in stocks and bonds, beginning as early as possible, gives your money a chance to grow beyond the low, single-digit annual percentage yield (APY) offered by savings accounts.
• Building generational wealth. If one of your goals is to pass assets on to the next generation, investing can help you grow and ultimately preserve the value of your wealth over many years.
• Generating income. Investing in bonds, dividend-paying shares or property can provide a regular income stream while growing your initial investment.
• You have excess cash. If your savings accounts are flush and your income covers your current expenses, consider putting some of the extra cash to work so that your purchasing power isn’t eroded by inflation.

Which One is Better?

Saving and investing are equally important components of a sound financial plan. Neither option is inherently "better" than the other unless they are tailored to specific goals. Even then, it is more accurate to say that one is better suited to certain objectives. For example, if your goal is financial security in retirement or creating a cushion against unexpected expenses or job loss, then saving is more likely to help you achieve those goals. On the other hand, if you have built up an adequate emergency fund and are motivated to grow your wealth, then investing will be a more appropriate use of your money.